| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051181940000
Date of advice: 20 January 2017
Ruling
Subject: Trading stock
Question 1
Will the Material supplied to Company under the Agreement constitute trading stock pursuant to section 70-10 of the ITAA 1997?
Answer
Yes
Question 2
Will a reasonable apportionment of the A$ upfront payment, that reflects the quantity of Material supplied to Company in an income year under the Agreement, be deductible pursuant to section 70-15 and section 8-1 of the ITAA 1997?
Answer
Yes
Question 3
Will the ongoing production cost payments made by Company under the Agreement be deductible pursuant to section 70-15 and section 8-1 of the ITAA 1997 on the basis they are incurred in connection with acquiring items of trading stock within the meaning of Division 70?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June xx - 30 June xx
The scheme commences on:
Year ended 30 June 20xx
Relevant facts and circumstances
The Australian resident taxpayer Company entered into an Agreement with a third party producer for the supply of certain types of Material produced by the producer out of natural resources that the producer has rights over. The supply of the Material will be delivered regularly (specified cycle) over the course of Agreement which is estimated to run a number of years according to the party's estimates of the availability of the resource and production capability.
The Agreement is for an indeterminate, unascertained and unquantifiable amount of Material to be delivered. There is no maximum nor minimum volume specified to be delivered.
As consideration for the Material to be supplied, under the Agreement the Company paid (a) an up-front amount (which is not refundable or adjustable for volume of Material actually delivered) plus (b) will pay a share of the producer's ongoing production costs which will be invoiced each specified cycle time.
The Agreement also provides the Company with certain step-in and pre-emptive rights and some oversight of the producer's operations.
The Company's stated purpose for acquiring this Material is to on-sell and the Company will include the income from sale in its assessable income.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 70-10
Income Tax Assessment Act 1997 section 70-15