Tax Law Improvement Act 1997 (121 of 1997)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

13   After Part 2-20

Insert:

Part 2-25 - Trading stock

Division 70 - Trading stock

Table of Subdivisions

Guide to Division 70

70-A What is trading stock

70-B Acquiring trading stock

70-C Accounting for trading stock you hold at the start or end of the income year

70-D Assessable income arising from disposals of trading stock and certain other assets

70-E Miscellaneous

70-1 What this Division is about

This Division deals with amounts you can deduct, and amounts included in your assessable income, because of these situations:

you acquire an item of trading stock;

you carry on a business and hold trading stock at the start or the end of the income year;

you dispose of an item of trading stock outside the ordinary course of business, or it ceases to be trading stock in certain other circumstances.

Table of sections

70-5 The 3 key features of tax accounting for trading stock

70-5 The 3 key features of tax accounting for trading stock

The purpose of income tax accounting for trading stock is to produce an overall result that (apart from concessions) properly reflects your activities with your trading stock during the income year.

There are 3 key features:

(1) You bring your gross outgoings and earnings to account, not your net profits and losses on disposal of trading stock.

(2) Those outgoings and earnings are on revenue account, not capital account. As a result:

(a) the gross outgoings are usually deductible as general deductions under section 8-1 (when the trading stock becomes trading stock on hand); and

(b) the gross earnings are usually assessable as ordinary income under section 6-5 (when the trading stock stops being trading stock on hand).

(3) You must bring to account any difference between the value of your trading stock on hand at the start and at the end of the income year. This is done in such a way that, in effect:

(a) you account for the value of your trading stock as assessable income; and

(b) you carry that value over as a corresponding deduction for the next income year.

Subdivision 70-A - What is trading stock

Table of sections

70-10 Meaning of trading stock

70-10 Meaning of trading stock

Trading stock includes:

(a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a *business; and

(b) *live stock.

Note 1: Shares in a PDF are not trading stock. See section 124ZO of the Income Tax Assessment Act 1936.

Note 2: If a company becomes a PDF, its shares are taken not to have been trading stock before it became a PDF. See section 124ZQ of the Income Tax Assessment Act 1936.

Subdivision 70-B - Acquiring trading stock

Table of sections

70-15 In which income year do you deduct an outgoing for trading stock?

70-20 Non-arm’s length transactions

70-25 Cost of trading stock is not a capital outgoing

70-30 Starting to hold as trading stock an item you already own

70-15 In which income year do you deduct an outgoing for trading stock?

(1) This section tells you in which income year to deduct under section 8-1 (about general deductions) an outgoing incurred in connection with acquiring an item of *trading stock. (The outgoing must be deductible under that section.)

(2) If the item becomes part of your *trading stock on hand before or during the income year in which you incur the outgoing, deduct it in that income year.

(3) Otherwise, deduct the outgoing in the first income year:

(a) during which the item becomes part of your *trading stock on hand; or

(b) for which an amount is included in your assessable income in connection with the disposal of that item.

Note: You can deduct your capital costs of acquiring land carrying trees or of acquiring a right to fell trees, to the extent that the trees are felled for sale, or for use in manufacture, by you. (This is because the trees will then usually become your trading stock.) See section 70-120.

70-20 Non-arm’s length transactions

If:

(a) you incur an outgoing that is directly attributable to your buying or obtaining delivery of an item of your *trading stock; and

(b) you and the seller of the item did not deal with each other at arm’s length; and

(c) the amount of the outgoing is greater than the market value of what the outgoing is for;

the amount of the outgoing is instead taken to be that market value. This has effect for the purposes of applying this Act to you and also to the seller.

Note 1: This section also affects the value of the item of trading stock at the end of an income year if you value it at its cost under section 70-45 (Value of trading stock at end of income year).

Note 2: This section is disregarded in applying Division 13 (about transfer-pricing arrangements) of Part III of the Income Tax Assessment Act 1936.

70-25 Cost of trading stock is not a capital outgoing

An outgoing you incur in connection with acquiring an item of *trading stock is not an outgoing of capital or of a capital nature.

Note: This means that paragraph 8-1(2)(a) does not prevent the outgoing from being a general deduction under section 8-1.

70-30 Starting to hold as trading stock an item you already own

(1) If you start holding as *trading stock an item you already own, but do not hold as trading stock, you are treated as if:

(a) just before it became trading stock, you had sold the item to someone else (at arm’s length) for whichever of these amounts you elect:

• its cost (as worked out under subsection (3) or (4));

• its market value just before it became trading stock; and

(b) you had immediately bought it back for the same amount.

Example: You start holding a unit of depreciable plant as part of your trading stock. You are treated as having sold it just before that time, and immediately bought it back, for its cost or market value, whichever you elect. (Subdivision 42-F provides for the consequences of selling depreciated property.)

The same amount is normally a general deduction under section 8-1 as an outgoing in connection with acquiring trading stock. The amount is also taken into account in working out the item’s cost for the purposes of section 70-45 (about valuing trading stock at the end of the income year).

Note: Depending on how you elect under paragraph (1)(a), the sale may or may not give rise to a capital gain or a capital loss for the purposes of Part IIIA (Capital gains and capital losses) of the Income Tax Assessment Act 1936. It does not if you elect to be treated as having sold the item for what would have been its cost: see subsection 160ZB(7) of that Act. However, it can if you elect market value.

When you must make the election

(2) You must make the election by the time you lodge your *income tax return for the income year in which you start holding the item as *trading stock. (If you do not make the election by then because you do not realise until later that you started to hold the item as trading stock, you must make the election as soon as is reasonable after realising that.)

However, the Commissioner can allow you to make it later (in either case).

How to work out the item’s cost

(3) The item’s cost is what would have been its cost for the purposes of section 70-45 (about valuing trading stock at the end of the income year) if it had been your trading stock ever since you last acquired it. In working that out, disregard section 70-55 (about acquiring live stock by natural increase).

(4) However, if you last acquired the item for no consideration and the acquisition involved:

(a) a disposal of the item to you for the purposes of Part IIIA (Capital gains and capital losses) of the Income Tax Assessment Act 1936; or

(b) the item passing to you as someone’s *legal personal representative, or as a beneficiary in a dead person’s estate;

its cost is taken to be its market value when you last acquired it.

Exceptions

(5) Subsection (1) does not apply if you start holding any of the following as *trading stock because they are severed from land:

(a) standing or growing crops;

(b) crop-stools;

(c) trees planted and tended for sale.

(This does not prevent subsection (1) from applying to a severed item that you later start holding as *trading stock.)

Note: A transaction that this section treats as having occurred is disregarded for the purposes of these provisions of the Income Tax Assessment Act 1936:

· subsection 47A(10) (which treats certain benefits as dividends paid by a CFC)

· paragraph 103A(3A)(c) (which affects whether a company is a public company for an income year).

Subdivision 70-C - Accounting for trading stock you hold at the start or end of the income year

Table of sections

General rules

70-35 You include the value of your trading stock in working out your assessable income and deductions

70-40 Value of trading stock at start of income year

70-45 Value of trading stock at end of income year

Special valuation rules

70-50 Valuation if trading stock obsolete etc.

70-55 Working out the cost of natural increase of live stock

70-60 Valuation of horse breeding stock

70-65 Working out the horse opening value and the horse reduction amount

70-70 Valuing interests in FIFs

General rules

70-35 You include the value of your trading stock in working out your assessable income and deductions

(1) If you carry on a *business, you compare:

(a) the *value of all your *trading stock on hand at the start of the income year; and

(b) the *value of all your *trading stock on hand at the end of the income year.

(2) Your assessable income includes any excess of the *value at the end of the income year over the value at the start of the income year.

(3) On the other hand, you can deduct any excess of the *value at the start of the income year over the value at the end of the income year.

70-40 Value of trading stock at start of income year

(1) The value of an item of *trading stock on hand at the start of an income year is the same amount at which it was taken into account under this Division at the end of the last income year.

(2) The value of the item is a nil amount if the item was not taken into account under this Division at the end of the last income year.

Note: For the value of trading stock at the start of the 1997-98 income year, see section 70-40 of the Income Tax (Transitional Provisions) Act 1997.

70-45 Value of trading stock at end of income year

(1) You must elect to value each item of *trading stock on hand at the end of an income year at:

(a) its *cost; or

(b) its market selling value; or

(c) its replacement price.

Note: An item’s market selling value at a particular time may not be the same as its market value.

(2) The rest of this Subdivision deals with cases where the normal operation of this section is modified, or where a different valuation method may or must be used. The table sets out other cases where that happens because of provisions outside this Subdivision.

Special valuation rules

70-50 Valuation if trading stock obsolete etc.

You may elect to value an item of your *trading stock below all the values in section 70-45 if:

(a) that is warranted because of obsolescence or any other special circumstances relating to that item; and

(b) the value you elect is reasonable.

70-55 Working out the cost of natural increase of live stock

(1) The cost of an animal you hold as *live stock that you acquired by natural increase is whichever of these you elect:

(a) the actual cost of the animal;

(b) the cost prescribed by the regulations for each animal in the applicable class of live stock.

(2) However, if you incur a service fee for insemination and, as a result, acquire a horse by natural increase, its cost is the greater of:

(a) the amount worked out under subsection (1); and

(b) the part of the service fee that is attributable to your acquiring the horse.

(3) An election under this section must be made by the time you lodge your *income tax return for the income year in which you acquired the animal. However, the Commissioner can allow you to make it later.

70-60 Valuation of horse breeding stock

(1) For a horse at least 3 years old that you acquired under a contract and hold for breeding, you can elect a value other than the values in section 70-45.

(2) The value you can elect for the horse at the end of the income year is worked out using the table:

(3) However, if the value worked out under subsection (2) would be less than $1, you must elect the value of $1.

(4) A horse’s age is to be measured in whole years as at the end of the relevant income year. The age of a horse not born on 1 August is determined as if the horse had been born on the last 1 August before it was actually born.

70-65 Working out the horse opening value and the horse reduction amount

(1) The horse opening value is:

(a) if the horse has been your *live stock ever since the start of the income year - its *value as *trading stock at the start of the income year; or

(b) otherwise - the horse’s base amount (see subsection (3)).

(2) The horse reduction amount is worked out as follows:

(a) for female horses under 12 years of age:

Base amount Breeding days

---------------- x -------------------

Reduction factor Days in income year

(b) for any male horse:

Breeding days

Base amount x Nominated percentage x -------------------

Days in income year

(3) In this section:

base amount is the lesser of:

(a) the horse’s *cost; and

(b) the horse’s *undeducted cost when it most recently became your *live stock.

breeding days is the number of whole days in the income year since you most recently began to hold the horse for breeding.

nominated percentage is any percentage, up to 25%, you nominate when you make the election in section 70-60.

reduction factor is the greater of:

(a) 3; and

(b) the difference between 12 and the horse’s age when you most recently began to hold it for breeding.

70-70 Valuing interests in FIFs

(1) You must value at its cost an item of your *trading stock that is an interest in a *foreign investment fund (a *FIF).

Note: For special rules about valuing an interest in a FIF that was an item of your trading stock on hand at the start of the 1991-92 income year, see section 70-70 of the Income Tax (Transitional Provisions) Act 1997.

(2) However, you may elect to value all your interests in *FIFs at their market value instead. If you make this election, then for the income year of the election, and for all later income years, you must value at their market value all your interests in FIFs.

(3) You can only make this election before you lodge your *income tax return for the first income year in which a *notional accounting period of any *FIF you have an interest in ends.

Subdivision 70-D - Assessable income arising from disposals of trading stock and certain other assets

Guide to Subdivision 70-D

70-75 What this Subdivision is about

Your assessable income includes the market value of an item of trading stock if you dispose of it outside the ordinary course of business or it ceases to be trading stock in certain other circumstances.

This Subdivision treats certain other assets in the same way as trading stock.

Table of sections

70-80 Why the rules in this Subdivision are necessary

Operative provisions

70-85 Application of this Subdivision to certain other assets

70-90 Assessable income on disposal of trading stock outside the ordinary course of business

70-95 Purchase price is taken to be market value

70-100 Notional disposal when you stop holding an item as trading stock

70-105 Death of owner

70-110 You stop holding an item as trading stock but still own it

70-115 Compensation for lost trading stock

70-80 Why the rules in this Subdivision are necessary

(1) When you dispose of an item of your trading stock in the ordinary course of business, what you get for it is included in your assessable income (under section 6-5) as ordinary income.

(2) If an item stops being your trading stock for certain other reasons, an amount is generally included in your assessable income to balance the reduction in trading stock on hand, which is a transaction on revenue account.

(3) The other reasons for an item to stop being your trading stock are:

(a) you dispose of it outside the ordinary course of *business; or

(b) interests in it change; or

(c) you die; or

(d) you stop holding it as trading stock.

Operative provisions

70-85 Application of this Subdivision to certain other assets

This Subdivision (except section 70-115) applies to certain assets of a *business as if they were *trading stock on hand of the entity that carries on that business. The assets are:

(a) standing or growing crops; and

(b) crop-stools; and

(c) trees planted and tended for sale.

Note: Section 70-115 assesses insurance or indemnity amounts for lost trading stock.

70-90 Assessable income on disposal of trading stock outside the ordinary course of business

(1) If you dispose of an item of your *trading stock outside the ordinary course of a *business:

(a) that you are carrying on; and

(b) of which the item is an asset;

your assessable income includes the market value of the item on the day of the disposal.

(2) Any amount that you actually receive for the disposal is not included in your assessable income (nor is it *exempt income).

Note 1: In the case of an asset covered by section 70-85 (which applies this Subdivision to certain other assets), the disposal will usually involve disposing of the land of which the asset forms part.

Note 2: For certain disposals of live stock by primary producers, special rules apply: see Subdivision 385-E.

Note 3: If the disposal is by way of gift, you may be able to deduct the gift: see Division 30 (Gifts).

Note 4: If the disposal is of trees, you can deduct the relevant portion of your capital costs of acquiring the land carrying the trees or of acquiring a right to fell the trees: see section 70-120.

70-95 Purchase price is taken to be market value

If an entity disposes of an item of the entity’s *trading stock outside the ordinary course of *business, the entity acquiring the item is treated as having bought it for the market value included in the disposing entity’s assessable income under section 70-90.

70-100 Notional disposal when you stop holding an item as trading stock

(1) An item of *trading stock is treated as having been disposed of outside the ordinary course of *business if it stops being trading stock on hand of an entity (the transferor ) and, immediately afterwards:

(a) the transferor is not the item’s sole owner; but

(b) an entity that owned the item (alone or with others) immediately beforehand still has an interest in the item.

Example: A grocer decides to take her daughters into partnership with her. Her trading stock becomes part of the partnership assets, owned by the partners equally. As a result, it becomes trading stock on hand of the partnership instead of the grocer. This section treats the grocer as having disposed of the trading stock to the partnership outside the ordinary course of her business.

Note: If the transferor is the item’s sole owner after it stops being trading stock on hand of the transferor, section 70-110 applies instead of this section.

(2) As a result, the transferor’s assessable income includes the market value of the item on the day it stops being *trading stock on hand of the transferor.

(3) The entity or entities (the transferee ) that own the item immediately after it stops being *trading stock on hand of the transferor are treated as having bought the item for the same value on that day.

Election to treat item as disposed of at closing value

(4) However, an election can be made to treat the item as having been disposed of for what would have been its *value as *trading stock of the transferor on hand at the end of an income year ending on that day.

(5) If this election is made, this *value is included in the transferor’s assessable income for the income year that includes that day. The transferee is treated as having bought the item for the same value on that day.

(6) This election can only be made if:

(a) immediately after the item stops being *trading stock on hand of the transferor, it is an asset of a *business carried on by the transferee; and

(b) immediately after the item stops being *trading stock on hand of the transferor, the entities that owned it immediately beforehand have (between them) interests in the item whose total value is at least 25% of the item’s market value on that day; and

(c) the *value elected is less than that market value; and

(d) the item is not a thing in action.

(7) Also, the election can only be made before 1 September following the end of the *financial year in which the item stops being *trading stock on hand of the transferor. However, the Commissioner can allow the election to be made later.

(8) An election must be in writing and signed by or on behalf of each of:

(a) the entities that own the item immediately before it stops being *trading stock on hand of the transferor; and

(b) the entities that own it immediately afterwards.

(9) If a person whose signature is required for the election has died, the *legal personal representative of that person’s estate may sign instead.

When election has no effect

(10) An election has no effect if:

(a) the item stops being *trading stock on hand of the transferee outside the course of ordinary family or commercial dealing; and

(b) the *consideration receivable by the transferor (or by any of the entities constituting the transferor) substantially exceeds what would reasonably be expected to be the consideration receivable by the entity concerned if the market value of the item immediately before it stops being *trading stock on hand of the transferor were the *value elected under subsection (4).

(11) Consideration receivable by an entity means so much of the value of any benefit as it is reasonable to expect that the entity will obtain in connection with the item ceasing to be *trading stock on hand of the transferor.

70-105 Death of owner

(1) When you die, your assessable income up to the time of your death includes the market value at that time of the *trading stock of your *business (if any).

Note: In the case of trees, you can deduct the relevant portion of your capital costs of acquiring the land carrying the trees or of acquiring a right to fell the trees: see section 70-120.

(2) The person on whom the *trading stock devolves is treated as having bought it for its market value at that time.

(3) However, your *legal personal representative can elect to have included in your assessable income (instead of the market value) the amount that would have been the *value of the *trading stock at the end of an income year ending on the day of your death.

(4) In the case of an asset covered by section 70-85 (which applies this Subdivision to certain other assets), your *legal personal representative can elect to have a nil amount included in your assessable income (instead of the market value).

(5) Your *legal personal representative can make an election only if:

(a) the *business is carried on after your death; and

(b) the *trading stock continues to be held as trading stock of that business, or the asset continues to be held as an asset of that business, as appropriate.

(6) If an election is made, the person on whom the *trading stock devolves is treated as having bought it for the amount referred to in subsection (3) or (4).

(7) An election can only be made on or before the day when your *legal personal representative lodges your *income tax return for the period up to your death. However, the Commissioner can allow it to be made later.

70-110 You stop holding an item as trading stock but still own it

If you stop holding an item as *trading stock, but still own it, you are treated as if:

(a) just before it stopped being trading stock, you had sold it to someone else (at arm’s length and in the ordinary course of business) for its *cost; and

(b) you had immediately bought it back for the same amount.

Example 1: You are a sheep grazier and take a sheep from your stock to slaughter for personal consumption. You are treated as having sold it for its cost. This amount is assessable income, just like the proceeds of sale of any of your trading stock.

Although you are also treated as having bought the sheep for the same amount, it would not be deductible because the sheep is for personal consumption.

Example 2: You stop holding an item as trading stock and begin to use it as plant for the purpose of producing your assessable income. You are treated as having sold it for its cost. This amount is assessable income, just like the proceeds of sale of any of your trading stock.

You are also treated as having bought the item for the same amount, which is relevant to working out the item’s cost for depreciation purposes: see Subdivision 42-B.

Note: A transaction that this section treats as having occurred is disregarded for the purposes of these provisions of the Income Tax Assessment Act 1936:

· subsection 47A(10) (which treats certain benefits as dividends paid by a CFC)

· paragraph 103A(3A)(c) (which affects whether a company is a public company for an income year).

70-115 Compensation for lost trading stock

Your assessable income includes an amount that:

(a) you receive by way of insurance or indemnity for a loss of *trading stock; and

(b) is not assessable as *ordinary income under section 6-5.

Subdivision 70-E - Miscellaneous

Table of sections

70-120 Deducting capital costs of acquiring trees

70-120 Deducting capital costs of acquiring trees

(1) This section gives you deductions for your capital costs of acquiring land carrying trees or of acquiring a right to fell trees.

Note: This section is included in this Division because:

· trees felled for sale, or for use in manufacture, by you will usually become your trading stock; and

· before they are felled, the trees are covered by sections 70-90 and 70-105 because of section 70-85.

Land carrying trees

(2) You can deduct an amount for the price you paid to acquire land carrying trees if:

(a) some or all of the trees are felled during the income year for sale, or for use in manufacture, by you for the *purpose of producing assessable income; or

(b) some or all of the trees are felled during the income year under a right you granted to another entity in consideration of payments as or by way of *royalty; or

(c) the market value of some or all of the trees is included in your assessable income for the income year by section 70-90 (because you disposed of the trees outside the ordinary course of *business) or section 70-105 (because of your death).

(It does not matter when you acquired the land.)

Note: The market value of trees is not included in your assessable income for the income year by section 70-105 (because of your death) if your legal personal representative elects under subsection 70-105(4) to have a nil amount included instead.

Right to fell trees

(3) You can deduct an amount for the price you paid to acquire a right to fell trees if:

(a) some or all of the trees are felled during the income year for sale, or for use in manufacture, by you for the *purpose of producing assessable income; or

(b) some or all of the trees are felled during the income year under a right you granted to another entity in consideration of payments as or by way of *royalty.

(It does not matter when you acquired the right.)

How much you can deduct for costs of acquiring land or right

(4) You can deduct for the income year so much of the price you paid as is attributable to the trees covered by a paragraph of subsection (2) or (3).

(5) If you can deduct an amount because of paragraph (2)(c), you can also deduct for the income year so much of any other capital expenditure you incurred as is attributable to acquiring the trees covered by that paragraph (except so far as you have deducted it, or can deduct it, for any income year under a provision of this Act outside this section).

Non-arm’s length transactions

(6) If:

(a) you can deduct an amount under this section for expenditure incurred in connection with a transaction; and

(b) the parties to the transaction did not deal with each other at arm’s length; and

(c) the amount of the expenditure is greater than the market value of what the expenditure is for;

the amount of the expenditure is instead taken to be that market value. This has effect for the purposes of working out what you can deduct under this section.

[The next Chapter is Chapter 3.]