Edited version of private ruling

Authorisation Number: 1011511089210

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Ruling

Subject: Depreciating assets/termination value, trading stock/ value and rollover relief

Questions

Is the termination value of the depreciating assets on the day of death of the partner, their market value?

Yes.

Does subsection 40-340(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provide rollover relief where both the outgoing partnership and the transferee agree?

Yes.

Does subsection 70-90(1) of the ITAA 1997 include the market value of the trading stock (growing crops) as assessable income where the trading stock is disposed of outside the ordinary course of business, due to the death of a partner?

Yes.

Does section 70-100(4) of the ITAA 1997 provide for the growing crop to be treated as having been disposed of for what would have been its value as trading stock of the partnership as if the date of death was the end of an income year, if both the outgoing partnership and the transferee agree?

Yes.

Relevant facts

A husband and wife were conducting a farming business in partnership when one died. The farming property and business were owned as joint tenants, and as such, the deceaseds interest in the property and business automatically transferred to the surviving partner upon her death. The surviving partner has continued to operate the farming business as a sole trader since then. At the time of the deceased's death, crops that were being grown by the partnership were just short of being harvested. The partnership also owned farming plant and equipment that was being used in the farming operations. The crop and plant and equipment were transferred to the surviving partner upon the deceased's death.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 40-300(2)
Income Tax Assessment Act 1997 Subsection 40-340(3)
Income Tax Assessment Act 1997 Subsection 70-85(a)
Income Tax Assessment Act 1997 Subsection 70-90(1)
Income Tax Assessment Act 1997 Subsection 70-80(3)
Income Tax Assessment Act 1997 Subsection 70-100(4)

Reasons for decision

Summary

The termination value of the depreciating assets that pass to the surviving partner on the day of death of the other partner because they are jointly held assets will be the market value.

Rollover relief will be available under section 40-340 of the ITAA 1997 provided all the requirements are met and the outgoing partners or their legal personal representative and the transferee agree.

The trading stock will be considered to be disposed of outside the ordinary course of business by the partnership on the day of death and the market value will be included as assessable income in the partnership.

Subsection 70-100(4) of the ITAA 1997 allows for an election for the growing crop to be treated as having been disposed of for what would have been its value as trading stock of the partnership as if the date of death was the end of an income year, if both the outgoing partnership and the transferee agree. The legal personal representative can sign on behalf of the deceased partner. This value would be considered to be nil, as normally no value would be included in trading stock for growing crops.

Detailed reasoning

Depreciating assets

For income tax purposes the depreciating assets are held by the partnership. The meaning of 'hold a depreciating asset' is set out in section 40-40 of the ITAA 1997. A depreciating asset that is a partnership asset is held by the partnership and not any particular partner.

On the death of a partner where the assets are held as joint tenants, the ownership of the share automatically passes to the other owner. Therefore a balancing adjustment event will occur under subsection 40-295(2) of the ITAA 1997 as there is a change in the holding of the interests of the entities in the asset, one of the entities that had an interest in the asset before the change has an interest in it after the change and the asset was a partnership asset before the change.

The termination value of the asset will be the market value as Item 5 in subsection 40-300(2) would apply. If Item 5 did not apply Item 10 would apply and this would give the same result with the termination value being the market value.

Roll-over relief would be available under subsection 40-340(3) as there has been a balancing adjustment event has occurred and an entity having an interest before the change has an interest in the asset after the change. If the choice is made, it must be in writing and contain enough information for the transferee to work out how the Division applies to the transferee and be made within six months after the end of the income year in which the balancing adjustment occurred, or within a longer period allowed by the Commissioner.

Trading stock

Subsection 70-85 (a) of the ITAA 1997 includes standing or growing crops as trading stock. On the death of the partner the trading stock stops being the trading stock of the partnership as there is a change in the interests held in the trading stock. The surviving partner obtains full ownership at the time of death of the other partner as the property was held as joint tenants (paragraph 70-80(3)(b) of the ITAA 1997). There is a notional disposal under section 70-100 of the ITAA 1997. The item of trading stock is treated as having been disposed of outside the ordinary course of business as it stops being trading stock of the partnership and immediately afterwards is held by an entity that had an interest beforehand.

Under subsection 70-100(4) of the ITAA 1997 an election can be made to treat the item as 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, provided that the entities that owned it immediately beforehand have interests in the item whose total value is at least 25% of the item's market value on that day. The surviving partner will meet these requirements.

This value would have been nil, as no amount is normally included in trading stock for a growing crop at the end of the financial year. The valuing of the growing crop at nil is supported by subsection 70-105(4). This section is applicable to the death of the owner where the trading stock passes to the estate and the business is continued to be carried on. In this situation the legal personal representative can elect to have a nil amount included in the assessable income of the individual.

The election must be in writing and signed by or on behalf of each of the entities. The legal personal representative of a person's estate may sign.