Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Exemption for interest in a FIF that is a Trading Stock
Overview
In some cases, a taxpayer's interest in a FIF may form part of the trading stock of the taxpayer. Under the existing trading stock provisions, a taxpayer can elect to value each item of trading stock at the lowest of cost, replacement value or net realisable value.
Where the taxpayer values trading stock consistently using market value the tax effect is similar to the application of the market value method of taxation provided under the FIF measures. The trading stock provisions however, have less compliance cost for taxpayers because there is no need for attribution accounts of the kind required for the FIF measures.
An exemption from FIF taxation will be provided to a taxpayer who elects to bring all FIF interests that are trading stock to account at market value.
For taxpayers who bring interests in FIFs to account as trading stock but do not avail themselves of the election, a change to the valuation methods available in the trading stock provisions will apply. The change will prevent movement between the methods of valuation and will require closing stock for the 1991-92 and subsequent years of income to be valued consistently at cost.
The exemption in Division 12 will apply where the taxpayer elects under subsection 31(5) to use market value to value all interests in FIFs as trading stock in respect of a year of income. [Section 521]
However, the exemption is only available if the taxpayer elects under subsection 31(5) to account for all interests in FIFs that are trading stock at market value.
The election is to be made before the taxpayer furnishes an income tax return in respect of FIF income for the first relevant period. Once the election is made the market value is to apply, to value all FIF interests that are trading stock for the income year to which the election first applies and all subsequent years. [Subsection 31(6)]
Changes will also be made to the trading stock provisions in section 31. These will apply to a taxpayer's FIF interests if the taxpayer does not exercise the election described above.
For the purposes of the trading stock provisions, an interest in a FIF will generally be brought into closing value at cost for the 1991-92 and subsequent income years. [Subsection 31(4)]
As a transitional measure, if a taxpayer used market value or replacement value for the opening value of a FIF interest at the start of the 1991-92 income year the taxpayer must use the same value for the closing value of that interest of the 1991-92 income year and all subsequent years of income. [Subsection 31(7)]
Clauses making the amendments
Clause 7: Inserts proposed subsections 31(4) to (8) to modify the trading stock provisions of the Principal Act.
Clause 27: Inserts Division 12 which will exempt a taxpayer from taxation under the FIF measures where the taxpayer elects to use market value to value all interests in FIFs that are trading stock in respect of a year of income.