Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Special transitional provision for some oyster farmers
Outline of chapter
1.1 This chapter explains the amendments in Schedule 1 to this bill which provide a transitional measure for oyster farmers using the traditional stick farming method, to assist them to apply the trading stock provisions in the income tax law.
Context of amendments
1.2 Oyster farmers use the traditional stick farming method to catch Sydney rock oysters. The method consists of placing sticks (or slats) in the water in areas of natural oyster spatfall, to which immature oyster spat attach themselves. Sydney rock oysters take 4 years to grow to maturity. During this time they may remain attached to the sticks (or slats), or the farmer may knock the spat off the sticks (or slats) at various stages of growth, and allow them to grow to maturity in baskets or trays in the water. This allows more even growth and produces better shaped oysters. Once the oysters have been knocked off the stick or slat, they will not reattach to any surface.
1.3 Generally, oyster farmers using the traditional stick farming method have not been bringing to account as trading stock the oysters they hold which are growing in the water. Those oysters are trading stock, and farmers carrying on a business are required to bring them to account where they are on hand at the end of an income year.
1.4 If oyster farmers using the traditional stick farming method for the first time brought their trading stock to account in the 2001-2002 income year, there would be a large one-off excess in the value of their closing stock over their opening stock (zero). This difference would be assessable income, and could cause severe financial hardship for some farmers in the industry.
Summary of new law
1.5 The amendments will allow eligible oyster farmers to bring to account an opening value for their oyster trading stock in the 2001-2002 transitional year, equivalent to a value per stick multiplied by the number of sticks used to capture the oysters as spat.
Detailed explanation of new law
1.6 These amendments apply to particular oysters that are trading stock on hand to give them a special value as at the start of the 2000-2001 income year. The amendments insert section 70-41 into the IT(TP) Act 1997. If this section applies, the value of the particular oyster trading stock on hand at the start of the 2001-2002 income year is calculated using the method statement in this section, rather than any other trading stock valuation rules.
To whom does the transitional provision apply?
1.7 The transitional provision, section 70-41, will only apply to taxpayers carrying on a business of oyster farming. It does not apply to oyster hatcheries. Hatcheries generally breed oysters in a controlled environment for the purpose of selling the immature spat to oyster farmers. [Schedule 1, item 1, paragraph 70-40(1)(a)]
1.8 It is also a requirement that the taxpayer held certain oysters (described in paragraph 1.15) as trading stock on hand at the start of the 2001-2002 income year. These are called the relevant stockin the section.
1.9 The final requirement is that the relevant stock should have been, but were not, taken into account as trading stock at the end of the 2000-2001 income year under Division 70 of the ITAA 1997 (the trading stock rules). [Schedule 1, item 1, paragraphs 70-41(1)(b), (c) and (d)]
1.10 Without a special transitional valuation rule for these oysters, the opening value for the purposes of the trading stock rules of this oyster trading stock would be nil, in accordance with subsection 70-40(2) of the ITAA 1997.
1.11 In summary, these amendments apply to oyster farmers who have stock on hand at the start of the 2001-2002 income year, that consists of certain oysters (described in paragraph 1.15) that should have been, but were not, brought to account as trading stock on hand at the end of the 2000-2001 income year. They will be able to bring a special value for those oysters to account at the start of the 2001-2002 income year, in accordance with the method provided in subsection 70-41(6).
1.12 The transitional provision will not apply if the 2001-2002 income year is the first income year in which the taxpayer is carrying on a business of oyster farming. If 2001-2002 is the first year the taxpayer is carrying on a business they will not have had oyster trading stock that should have been brought to account at the end of the previous income year.
1.13 The transitional provision will also not apply if the taxpayer had brought any of the particular oysters to account as trading stock at the end of the 2000-2001 income year. If this is the case, the taxpayers opening stock value for the 2001-2002 income year will be worked out in accordance with section 70-40 of the ITAA 1997, and because the opening value will not be nil, no special transitional rule is required.
Which oysters are subject to the transitional provision?
1.14 Subsection 70-41(2) describes the oysters to which this transitional provision applies. It only includes those oysters that:
- •
- were farmed by the taxpayer solely for food as human consumption;
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- had not been harvested at the start of the 2001-2002 income year; and
- •
- had been acquired by the taxpayer using the traditional stick farming method.
[Schedule 1, item 1, subsection 70-41(2)]
1.15 Oysters that the taxpayer held as trading stock on hand at the start of the 2001-2002 income year and that satisfy these conditions, are called the relevant stock in the section.
1.16 Oysters that have been farmed for purposes other than solely for human consumption (such as pearling oysters) are already being brought to account as trading stock, and therefore do not require a special transitional provision. [Schedule 1, item 1, paragraph 70-41(2)(a)]
1.17 The practice in the oyster farming industry has been to bring harvested oysters that are on hand at the end of an income year to account as trading stock. Therefore, harvested oysters are excluded from this provision. [Schedule 1, item 1, paragraph 70-41(2)(b)]
1.18 The traditional stick farming method is the placing of plastic slats or wooden sticks in the water for the purpose of capturing oyster spat, and the oyster spat attaching themselves to those slats or sticks. [Schedule 1, item 1, paragraph 70-41(2)(c)]
1.19 The oysters must have been acquired by the taxpayer, using the traditional stick farming method. Therefore, even if someone else captured the oysters using the traditional stick farming method, and the taxpayer purchased the oysters from them, this transitional provision will not apply to those oysters. [Schedule 1, item 1, paragraph 70-41(2)(c)]
1.20 Although the oysters must have been acquired by the taxpayer using the traditional stick farming method, some of those oysters may have been knocked off the slats or sticks since acquisition and placed in trays or baskets (or some other container) in the water to continue to grow. As long as these oysters have not yet been harvested, this transitional provision will still apply to these oysters. [Schedule 1, item 1, paragraph 70-41(2)(c)]
What happens if the transitional provision applies?
1.21 If the transitional provision applies then the value of the relevant stock, as at the start of the 2001-2002 income year, is worked out under this transitional provision, rather than under Division 70 (the general trading stock rules) or Subdivision 328-E (the trading stock provisions for STS taxpayers) of the ITAA 1997. [Schedule 1, item 1, subsections 70-41(3) to (5)]
1.22 The general rule is that the value of the relevant stock as items of trading stock on hand is worked out using the method statement in new subsection 70-41(6) of the IT(TP) Act1997. It is not to be worked out under section 70-40 of the ITAA 1997.
1.23 There is a special rule in this transitional provision for calculating the value of opening stock for taxpayers that were STS taxpayers for the 2001-2002 income year. This is because subsection 328-295(1) of the STS provisions provides a value for all of the trading stock on hand at the start of the income year. There may be a situation where an oyster farmer has trading stock other than relevant stock (e.g. oysters that have been harvested), and in this case if the transitional provision applied to the exclusion of section 328-295, only a value for the relevant stock would be able to be brought to account at the start of the 2001-2002 income year.
1.24 The special rule for STS taxpayers in subsection 70-41(5) provides that trading stock on hand at the start of the 2001-2002 income year is to be valued by using the method statement in subsection 70-41(6) of the IT(TP) Act 1997for the value of the relevant stock, and adding this to the value of any other trading stock that was brought to account under Division 70 of the ITAA 1997at the end of the 2000-2001 income year. The relevant stock is not to be counted twice.
1.25 If there was no other trading stock, or no other trading stock was brought to account at the end of the 2000-2001 income year, then the value of all of the trading stock on hand at the start of the 2001-2002 income year is the value of the relevant stock worked out using this transitional provision.
1.26 Subsection 70-41(5) only refers to other trading stock brought to account under Division 70 at the end of the 2000-2001 income year (rather than under Division 70 or Subdivision 328-E), because the STS provisions in Division 328 of the ITAA 1997 only apply to an income year starting after 30 June 2001. Therefore, no value for the other stock could have been brought to account under the STS provisions at the end of the 2000-2001 income year.
How does the transitional valuation method work?
1.27 The method statement in subsection 70-41(6) applies to give a value to the relevant stock on a per stick (or slat) basis.
1.28 The method statement effectively requires the number of wooden sticks or plastic slats that were used to capture the relevant stock to be calculated. This requires a calculation of not only the sticks (or slats) that were in use at the start of the 2001-2002 income year to capture spat, but also the number of sticks (or slats) that were used to capture the relevant stock that is no longer attached to sticks. The numbers of wooden sticks, 1 metre long plastic slats and 2 metre long plastic slats must be differentiated.
1.29 As well, if any sticks (or slats) were reused, they must be counted each time they were used.
1.30 The number of wooden and 2 metre long plastic slats used to capture the relevant stock are multiplied by $1, and the number of 1 metre long plastic slats used is multiplied by $0.50. The value of the relevant stock is the sum of those 2 calculations.
1.31 These values were arrived at based on an average of sample costings prepared by industry representatives.
1.32 The application of the method statement is demonstrated in Example 1.1.
Example 1.1
Robert is an oyster farmer to whom the transitional provision applies.
At 1 July 2001 Robert had wooden sticks and 1 metre long plastic slats in the water to capture oyster spat, as well as oysters at various stages of maturity in baskets in the water.
Steps 1 and 2: Robert calculates that he had 2,000 1 metre long plastic slats in the water at 1 July 2001, and the oysters in baskets were captured using 1,000 of the plastic slats that are currently in the water being reused, and another 1,000 plastic slats that were each used twice. Therefore the result of step 1 and step 2 is 5,000 1 metre long plastic slats.
Step 3: The 5,000 plastic slats from step 2 are multiplied by 50 cents to give $2,500.
Step 4: Robert does not use any plastic slats that are 2 metres long. He also does not reuse any of his wooden sticks. He had 3,000 wooden sticks in the water at 1 July 2001, and he estimates that the oysters in baskets were captured using 6,000 wooden sticks. Therefore the total number of wooden sticks used to acquire the relevant stock is 9,000.
Step 5: As none of the wooden sticks are reused the result of step 5 is also 9,000.
Step 6: The result of step 5 is multiplied by $1 to give $9,000.
Step 7: The results of steps 3 and 6 are added together:
$2,500 + $9,000 = $11,500.
This is the value of Roberts relevant stock.
1.33 The slats and sticks that are referred to in the method statement as being used to acquire the relevant stock are the slats and sticks that were placed in the water for the purposes of capturing the oyster spat using the traditional stick farming method (as described in paragraph 70-41(2)(c)). [Schedule 1, item 1, subsection 70-41(7)]
Certain provisions not affected
1.34 Section 70-41 does not affect the operation of any of the following provisions:
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- section 102AAY of the ITAA 1936 (modified application of trading stock provisions for certain non-resident trust estates);
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- section 397of the ITAA 1936 (modified application of trading stock provisions for eligible CFCs);
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- section 57-115 of Schedule 2D to the ITAA 1936 (modified application of trading stock provisions for tax exempt entities that become taxable); and
- •
- section 165-115W of the ITAA 1997 (trading stock decrease for a CGT asset).
[Schedule 1, item 2, subsection 70-41(5)]
Application and transitional provisions
1.35 The amendments will only apply to the opening stock value of eligible oyster farmers for the 2001-2002 income year. After this, the normal trading stock rules will apply.
Consequential amendments
1.36 Notes have been inserted into the ITAA 1997at the end of section 70-40 (the general trading stock rule about the value of trading stock at the start of an income year) and at the end of subsection 328-295(1) (the STS rules about the value of trading stock at the start of an income year). These notes provide signposts to the transitional provision for oyster trading stock acquired using the traditional stick farming method. [Schedule 1, items 2 to 5]
1.37 Also, a note has been inserted into the dictionary in subsection 995-1(1) of the ITAA 1997 after the definition of value of an item of trading stock. This note also acts as a signpost to the transitional provision for oyster trading stock acquired using the traditional stick farming method. [Schedule 1, items 6 and 7]
REGULATION IMPACT STATEMENT
Policy objective
1.38 The objective of these amendments is to assist oyster farmers using the traditional stick farming method (eligible oyster farmers) to apply the trading stock rules. The amendments will provide a transitional treatment to allow oyster farmers to apply an opening stock value to their trading stock in the transitional year. This will remove any transitional costs in complying with the trading stock rules.
Implementation options
1.39 Legislative amendments are necessary to implement the transitional measure to assist eligible oyster farmers to apply the trading stock rules.
1.40 Without legislative amendments eligible oyster farmers who have not been bringing trading stock to account would be required to have an opening value for trading stock of nil in the first year they began to comply with the trading stock rules.
1.41 There were 2 options considered for describing the value that could be used by eligible oyster farmers for their opening stock for the 2001-2002 income year. The first was to allow these oyster farmers to bring the costs of their trading stock to account on a per stick basis, but require each individual oyster farmer to calculate their costs, and average them over the number of sticks.
1.42 The second option was to provide a value per stick in the legislation that could be applied to the number of sticks used by an eligible oyster farmer in capturing their oyster stock.
Assessment of impacts
1.43 Under either of the 2 options, the amendments will only have an impact for the transitional income year of 2001-2002. These amendments are designed to ensure that there will be no transitional cost to stick farmers in applying the trading stock rules for the first time. Eligible oyster farmers will not be required to account for the difference between the nil value of the opening stock (which is what the law would otherwise provide) and the value of the closing stock in the year they commence compliance with the trading stock rules (2001-2002).
1.44 The transitional measure applies to oyster farmers using the traditional stick farming method to capture oyster spat grown solely for human consumption (eligible oyster farmers). This method of capturing oyster spat is almost exclusively used to capture spat of the Sydney rock oyster (Saccostrea commercialis), which is grown in New South Wales and Queensland. There are approximately 500-600 oyster farmers using the traditional stick farming method.
1.45 Neither option would create any new obligations or requirements for the taxpayers impacted.
1.46 There will be no increase in administrative costs for the ATO.
1.47 The amendments will benefit eligible oyster farmers, who otherwise would have been required to bring the value of all of their trading stock to account in one income year, in the first year they began to apply the trading stock rules. This would have resulted in a large one-off increase in income that would have caused serious financial hardship to some eligible farmers. Instead, they will be allowed to apply an opening stock value for the transitional year, which means that only changes in the value of their trading stock over the year will be brought to account at the end of the income year.
1.48 The first option would require each farmer to calculate the actual costs incurred in capturing their oyster trading stock on hand at the start of the 2001-2002 income year. As Sydney rock oysters take 4 years to mature, many of these costs would have been incurred over the previous 3 to 4 years. The number of sticks (or plastic slats) used to capture the oyster trading stock would also need to be calculated and the costs incurred averaged over the number of sticks (or slats) used.
1.49 The second option would require each farmer to calculate the number of sticks (or plastic slats) that were used to capture their oyster trading stock on hand at the start of the 2001-2002 income year. They would then multiply this by the value provided for each stick in the legislation. There would be no need to calculate the actual costs incurred in capturing the stock on hand at the start of the 2001-2002 income year.
Consultation
1.50 Oyster industry representatives have been consulted extensively over several years on the trading stock obligations of oyster farmers, and on the current proposal to provide transitional measures.
1.51 Following consultation it has been accepted by the industry that oysters are trading stock, and must be brought to account each income year.
1.52 The difficulties for oyster farmers in retrospectively calculating the actual costs involved in capturing the oyster trading stock on hand at the start of the 2001-2002 income year were highlighted during consultation.
Conclusion and recommended option
1.53 The amendments will benefit eligible oyster farmers and prevent a large one-off increase in their taxable income that would otherwise occur when they started to comply with the trading stock rules.
1.54 After consultation with industry representatives the second option (as described in paragraph 1.50) was chosen, as the method that imposed the least compliance costs on the industry. Values were chosen based on sample costings prepared by the industry representatives. The values provided in the legislation are $1 for each wooden stick and 2 metre plastic slat, and $0.50 for each 1 metre plastic slat.