Taxation Ruling

IT 2002

Purchase and sale of import quota

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FOI status:

May be releasedFOI number: I 1102920

NOTICE OF ARCHIVAL

PREAMBLE

On 1 January 1982 the Department of Business and Consumer Affairs introduced a new quota program that applies to the importation of the bulk of finished textiles, clothing and footwear products. The programme, which will continue for seven years, provides for initial allocation by the Minister and for the subsequent transfer of quota entitlement between new and existing importers. The taxation consequences of such arrangements have now been considered in this office.

2. The quota scheme does not impose a prohibition on the importation of goods outside of the new quota arrangements. It provides that, within an importer's specified quota entitlement, the normal rates of Customs duty will apply, while, outside of that limit, additional duties (known as penalty duties) shall be payable. Therefore, where an importer enters goods for home consumption, he gains a financial advantage if he is able to import those goods under a quota arrangement.

3. Quota entitlement is obtained in several ways:-

(i)

base quota allocation;

(ii)

base quota purchase;

(iii)

annual quota entitlement or purchase;

(iv)

tender.

4. Central to the introduction of the quota programme is the base quota allocation or "base performance". A base performance was allocated to existing importers on the basis of their previously established levels of imports for the two years ending 30 June 1980. It is the base performance that sets an importer's annual quota entitlement, "quota". The annual quota entitlement is the quantity of a particular category of goods that may be entered at normal rates of duty.

5. The holder of a base performance may dispose of all or part of either the base performance or the annual quota entitlement that attaches to it. However, the assignment of a base performance is an irrevocable step as the importer then loses all future entitlement rights under that base performance. On the other hand, the holder of a base performance may transfer to another person his annual quota entitlement while still retaining the base performance.

6. Quota entitlement may also be obtained under the tender system which operates in conjunction with the other quota arrangements. Under the tender system, an importer may obtain a quota entitlement but will be required to pay an additional duty over and above the normal duty that applies to the particular category of goods. However, this additional duty would be less than the penalty rate of duty that applies where goods are imported outside of the quota system.

7. The income tax considerations that may arise concern the assessability of amounts received on the disposal of base performance or annual quota entitlement and the deductibility of amounts expended by the other party to such arrangements.

RULING

8. Whether a particular transaction is one of capital or revenue nature ultimately depends upon the facts of a given case. However, there are some instances where the profits arising from the disposal of base performance or quota clearly represent assessable income, i.e. where the vendor is in the business of trading in import quotas, where the base performance or quota was acquired by the vendor for the purpose of resale at a profit or where the base performance or quota was purchased and sold within twelve months.

9. In the generality of cases, however, the character of the proceeds of the sale of base performance or quota, i.e. whether they are assessable income, will depend upon whether it can be said that the proceeds arise from the carrying on of a business. Essentially, base performance and quota are entitlements to purchase and import trading stock at normal rates of duty. The proceeds of the sale of trading stock would be assessable income. For the purposes associated with the carrying on of his business, an importer may decide to sell all or part of his base performance or quota. In these circumstances, it would seem that the sale price would form part of the proceeds of the business and, therefore, assessable income.

10. The situation may be likened to that which arose in Case K3, Vol. 78 ATC, p.16. That case involved the sale of export entitlements by a meat exporter. The Board concluded that the proceeds of sale were proceeds of carrying on the particular business and were, therefore, assessable income. The basis of the decision was that export entitlements were an integral part of a meat exporter's business of making profits as a meat exporter.

11. There would be some instances in which the sale of quota or base performance would be properly treated as being of a capital nature, e.g. where it is sold for the purposes of closing down a business or a substantial part of a business.

12. A similar approach is taken in considering whether the expense incurred in acquiring annual quota or a base performance is an allowable deduction. Generally, such expenditure will be allowed as a deduction where the base performance or quota is acquired by an existing importer who may wish to increase his existing business turnover. However, where the expenditure is incurred as part of the cost of establishing a new business, the outgoing would be considered to be of a capital nature and, as such, not deductible.

13. Additional duty paid by an importer under the tender system will, generally, be regarded as a revenue expense.

14. Finally, it should be mentioned that the provisions of section 26AAA have no application to the disposal of base performance or quota within twelve months of initial allocation by the Minister. This is so because property is not transferred when the Minister determines quota entitlement. All that is involved is a ministerial determination. It is different, of course, where base performance or quota is purchased from another importer and sold within twelve months. As previously stated, section 26AAA is considered to authorise assessment in such a case.

15. The following answers have been given in the specific situations referred to:-

1.

Total sale of business - the proceeds from sale of quota and/or base performance would be receipts of a capital nature not assessable for income tax.

2.

Partial sale of business - disposal of 75% of quota and base performance and conversion of business to manufacturer - 25% of quota retained in one or two categories - any final answer must, of course, depend upon the facts but there would seem to be a closing down of a substantial part of the business sufficient to characterise the proceeds of the sale of quota and base performance as capital.

3.

Importer/local manufacturer sells his base performance and ceases to import - the proceeds from sale of base performance would be regarded as a capital receipt.

4.

Total sale of importing business followed some short time later by re-entry into importing activities - if the cessation of the importing business was bona fide, the proceeds of sale of quota and base performance would be receipts of a capital nature. The cost of acquiring the new quotas would also be of a capital nature.

5.

Payment for transfer of tender quota - if the payment was made by an existing importer to increase turnover, it would be tax deductible. If the payment was made for the purpose of setting up a new business, it would not be deductible.

COMMISSIONER OF TAXATION
6 DECEMBER 1982

References

ATO references:
NO 81/3885 F58

Related Rulings/Determinations:

IT 2002 NOTICE OF ARCHIVAL

Subject References:
IMPORT QUOTA - PURCHASE OR SALE
TEXTILE
CLOTHING
FOOTWEAR

Legislative References:
25(1)
26(a)
26AAA

Case References:
Case K3
78 ATC 16