Edited version of private advice

Authorisation Number: 1052194608810

Date of advice: 14 December 2023

Ruling

Subject: Tax treatment of compensation for loss of livestock - bees

Question 1

Is the company eligible to make an election under Subdivision 385-E of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the reimbursement income for the bees, hives, honey, frames, wax, and hive accessories able to be deferred under section 385-110 of the ITAA 1997?

Answer

Yes, except for the money received for the honey foregone.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The entity received a reimbursement from a relevant State Authority for the forced disposal of bees and associated stock due to infestation of the Varroa Mite. The amount was paid under the Varroa Mite Emergency Response Program.

The total reimbursement income was for hives, honey, frames, wax & hive accessories, honey foregone, as well as for the replacement of the bees. The isolated mated breeder queens were destroyed as well. The money will be spent on bees, honey, and boxes.

Relevant legislative provisions

Income Tax Assessment Act 1936 former 36AAA

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 385-90

Income Tax Assessment Act 1997 subsection 385-100(1)

Income Tax Assessment Act 1997 paragraph 385-100(2)(c)

Income Tax Assessment Act 1997 section 385-105

Income Tax Assessment Act 1997 subsection 385-105(1)

Income Tax Assessment Act 1997 subsection 385-105(3)

Income Tax Assessment Act 1997 section 385-110

Income Tax Assessment Act 1997 section 385-160

Income Tax Assessment Act 1997 section 385-163

Reasons for decision

Question 1

Is the entity eligible to make an election under Subdivision 385-E of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The entity is eligible to make an election under Subdivision 385-E of the ITAA 1997.

Detailed reasoning

Eligibility

A primary production business is defined in subsection 995-1(1) of the ITAA 1997 to include a business of 'maintaining animals for the purpose of selling them or their bodily produce (including natural increase)'. Bees, being insects, are animals and honey is the bodily produce of bees.

The definition of livestock excludes 'animals used as beasts of burden or working beasts in a business other than a primary production business' (subsection 995-1(1) of the ITAA 1997). Taxation Determination TD 2008/26 Income tax: are bees kept for use in a honey production business trading stock as defined in section 70-10 of the Income Tax Assessment Act 1997? states that the bees in that situation are livestock and they are trading stock.

Subdivision 385-E of the ITAA 1997 allows a taxpayer to elect to spread or defer tax on profit from forced disposal or death of livestock that was held as assets of a primary production business carried on in Australia.

Section 385-100 of the ITAA 1997 outlines the conditions when a taxpayer can make an election either to spread the tax profit over five years, or defer tax profit and reduce cost of replacement livestock.

Subsection 385-100(1) of the ITAA 1997 states that a taxpayer can make an election if:

(a)          the taxpayer disposes of 'livestock', or they die, because:

                             i.                land is compulsorily acquired or resumed under an Act; or

                            ii.                a State or Territory leases land for a cattle tick eradication campaign; or

                           iii.                pasture or fodder is destroyed by fire, drought or flood and you will use the proceeds of the disposal or death mainly to buy replacement stock or to maintain breeding stock for the purpose of replacing the livestock; or

                           iv.                they are compulsorily destroyed under an Australian law for the control of a disease or they die of such a disease; or

                            v.                you receive an official notification under an Australian law dealing with contamination of property; and

(b)          the taxpayer held the livestock as assets of a primary production business they carry on in Australia; and

(c)           apart from this Subdivision, their assessable income for any income year would include the proceeds of the disposal or death.

'If the livestock die, and you do not dispose of their carcases to someone else - any compensation you receive for their death or destruction from an Australian government agency' will be the proceeds of the disposal or death (paragraph 385-100(2)(c) of the ITAA 1997).

Special provisions may apply to abnormal receipts of primary production producers that carry on a business in Australia relating to the forced disposal or death of livestock, and the proceeds of the disposal would otherwise be assessable (sections 385-90 and 385-100 of the ITAA 1997).

Summary

As the entity was carrying on a primary production business in Australia and was forced to dispose of their livestock, the proceeds of the disposal would otherwise be assessable, and they are going to continue to carry on the primary production business, they are eligible to make an election under Subdivision 385-E of the ITAA 1997.

Question 2

Is the reimbursement income for the bees, hives, honey, frames, wax, and hive accessories able to be deferred under section 385-110 of the ITAA 1997?

Summary

The compensation payment for the bees, hives, frames, wax, and hive accessories, apart from that received for the honey foregone, can be used to reduce the cost of replacement stock purchased in the disposal year and the following 5 income years.

Detailed reasoning

Taxation of the compensation payment

Section 385-100 of the ITAA 1997 provides for circumstances in which a primary producer can elect either to:

•                     spread the 'tax profit on the disposal or death' of livestock over a 5-year period (section 385-105), or

•                     defer the inclusion of the 'unused tax profit on the disposal or death' of livestock in assessable income, if the proceeds of the disposal are to be used mainly to buy replacement livestock or to maintain breeding stock for the purpose of replacement of the livestock that were disposed of or died (section 385-110).

The tax profit is the amount left after reducing from the proceeds the amount paid to purchase any livestock during the financial year and the value of the trading stock on hand at the start of the financial year (subsection 385-105(3) of the ITAA 1997).

Spread over 5 years

You can elect, under subsection 385-105(1) of the ITAA 1997:

•                     to include in your assessable income for the disposal year the proceeds of the disposal or death, reduced by the tax profit on the disposal or death, and

•                     20% of the tax profit on the disposal or death in your assessable income for the disposal year, and

•                     20% of the tax profit on the disposal or death in your assessable income for each of the next 4 income years.

Defer the income

There is an alternative where you can elect to defer the tax profit and reduce the cost of replacement livestock (section 385-110 of the ITAA 1997). This election can be used if the proceeds of disposal were mainly used 'to buy replacement livestock' or 'to maintain breeding stock' for the purpose of replacing the livestock that were disposed of (subsection 385-110(2) of the ITAA 1997).

Under this election you can:

(a)          in the disposal year, include in your assessable income the proceeds of the disposal or death reduced by the tax profit on the disposal or death

(b)          reduce the cost of replacement livestock purchased in the disposal year (or any of the next 5 income years) by, but not more than, the profit on the disposal or death, and

(c)           include any unused tax profit on the disposal or death in the assessable income of the last of the 5 income years after the disposal year.

Your income can include any amount you choose for each replacement animal you breed in that income year, or you can choose not to include an amount (section 385-115 of the ITAA 1997). The amount is not reduced to less than nil (subsection 385-120(4) of the ITAA 1997). An amount included in the assessable income because of this election is an amount from carrying on the primary production business (section 385-155 of the ITAA 1997).

Taxation Ruling IT 211 Forced disposal of livestock is about the forced disposal of livestock and the concept of maintenance of breeding stock. In regards to 'used mainly to buy replacement livestock', that a 'more substantial portion of the proceeds than 50 per cent should be applied to the specific purpose', and it is considered that at least 66% of the proceeds should be so applied (paragraph 3 of IT 211). IT 211 provides that a narrow approach should not be adopted in interpreting the concept of maintaining breeding stock. For example, the cost of providing fodder by engaging a contractor, or the purchase of a tractor for pushing down re-growth of scrub to provide feed during drought conditions, and the construction of a dam or a feed shed fall 'within the description of maintenance of breeding stock for the purposes of' former section 36AAA of the Income Tax Assessment Act 1936 (ITAA 1936). This section of the Act was replaced by Subdivision 385-E of the ITAA 1997.

In this case, the entity carries on a business of primary production, and the reimbursement income received relates to the forced disposal or death of livestock due to the Varrao Mite - the bees, future honey, and the equipment used for beekeeping. The reimbursement will be used for the purchase of new livestock - bees, honey, and boxes and the maintenance of breeding stock with the new equipment when it is purchased. Some of the honey, and the equipment used for beekeeping are expenses that fall within the description 'maintenance of breeding stock'. They are items that are used to maintain the bees.

The special provisions for abnormal receipts are available to the entity. Accordingly, the compensation payment relating to the loss of the beekeeping business, apart from the amount for the honey foregone, can be deferred as follows:

•                     in the disposal year, the proceeds of the disposal or death, reduced by the tax profit on the disposal or death

•                     reduce the cost of replacement livestock bought in the disposal year or any of the next 5 income years by the tax profit on disposal, and

•                     include the unused tax profit in the last of the 5 income years following the disposal year.

The payment for honey foregone is an amount that replaces revenue. It is not for the maintenance of breeding stock. It would not be subject to the abnormal income rules and would be assessable under section 6-5 of the ITAA 1997 in the year in which it is received.