Edited version of your written advice

Authorisation Number: 1051301054630

Disclaimer

You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.

Date of advice: 27 October 2017

Ruling

Subject: Trading Stock

Question

Can the proposed transfer of trading stock (cattle) be made at book value?

Answer

Yes

This ruling applies for the following period(s)

Year ending 30 June 2018

The scheme commences on

1 July 2017

Relevant facts and circumstances

You own a commercial cattle enterprise.

You run the enterprise as a sole trader.

For succession purposes, will enter into partnership arrangement with another taxpayer via a unit trust.

The cattle are trading stock of the cattle enterprise owned by you.

You have a commercial number of cattle with a book value.

Under the new unit trust, you will retain a 50% ownership interest in the income and capital of the unit trusts assets.

Assumptions

It is assumed under the new unit trust, you will retain a 50% ownership interest in the income and capital of the unit trusts assets as a trust deed has not been provided for this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 70-100

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

If you dispose of trading stock outside the ordinary course of business, the entity that acquires the trading stock is treated as having brought that trading stock for market value, with that same amount being assessable income in the hand of the original entity.

If the interests in an item of stock change (e.g. a partnership takes in a new partner), then the law may treat it as being a disposal outside the ordinary course of business.

This happens when there is not a complete change in interests but the item ceases to be trading stock of the original entity.

This disposal outside the ordinary course of business would normally be treated as occurring at market value. However, if the item is an asset of the new owners business, and all the owners agree, they can elect to roll it over for the value at which the original entity would have taken it into account at the end of the year. A 25% continuity of interests is required for this election to be available.

An item of stock is given the value it had as closing stock at the end of the preceding income year. There is a choice of valuing an item at either cost price, market selling value or the replacement price. In your case you have advised that the cost price is the book value.

In your case, you will transfer your ownership interest of the cattle to a new unit trust outside the ordinary course of business. This transfer will be outside the ordinary course of business because the cattle will stop being trading stock belonging to your enterprise and immediately after the transfer; you will retain a 50% ownership interest in the cattle under the new unit trust.

Accordingly, you may elect to treat the cattle as disposed of at their book value to the new unit trust.

ATO view documents

Tax Determination TD 96/3

Tax Determination TD 96/4

ATO ID 2003/203

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).