Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)
Chapter 10 - Trading Stock
This chapter explains the rewritten provisions about the income tax treatment of trading stock.
These provisions are contained in new Divisions 70 and 385 in Schedule 1 to the Tax Law Improvement Bill 1997.
Transitional provisions and consequential amendments are contained in Schedule 5 to the Bill.
This chapter covers:
- •
- the rewritten provisions in Divisions 70 (trading stock) and 385 (primary production) in Schedule 1 to the Tax Law Improvement Bill 1997, and
- •
- the transitional provisions and consequential amendments required because of those rewritten provisions. They are in Schedule 5 to the Bill.
Divisions 70 and 385 replace provisions of the 1936 Act that deal with trading stock and some similar assets. The 1936 Act provisions are in sections 26B, 26BA, and 28 to 37.
Part A of this chapter summarises new Divisions 70 and 385 in Schedule 1.
Part B explains the changes proposed to the content of the current provisions.
Part C explains why certain provisions of the 1936 Act are not being rewritten.
Part D explains the transitional provisions in Part 1 of Schedule 5 which set out how, and from when, the rewritten provisions will apply.
Part E explains consequential amendments to be made to the 1936 Act, the 1997 Act and other Commonwealth legislation. These are located in Parts 2 to 4 of Schedule 5 to the Bill.
A. Summary of the new law
Guide to Division 70: Tax accounting for trading stock
Trading stock is the things (eg. goods, land, intangible property) in which a business trades. Trading stock includes the raw materials and partially finished products that a manufacturer will convert into finished goods for trading. It also includes live stock. [section 70-10]
How is trading stock accounted for?
A business trading in assets generally deducts the cost of acquiring trading stock and includes in assessable income the proceeds of sales made in the ordinary course of the business.
Also, the difference between the values of the stock on hand at the start and end of each year is taken into account.
Losses or outgoings in acquiring trading stock are general deductions under section 8-1 of the pending 1996 Act.
The law does not treat expenditure in acquiring trading stock as non-deductible capital expenditure [section 70-25] .
When are those deductions available?
Expenditure in acquiring trading stock will generally be deductible in the income year you incur it. However, if the stock has not come on hand by the end of the year, the expenditure is deductible in the first year when:
- •
- the item becomes stock on hand; or
- •
- an amount is included in assessable income due to disposal of the item. [section 70-15]
What if the value is inflated?
If trading stock is bought for more than its market value, it is treated as having been bought for its market value. [section 70-20]
This expression has a generally well understood meaning but has also been the object of judicial consideration.
In working out the market value, the courts will make appropriate assumptions about the market in question. These can be affected by the actual transaction under consideration. For example, the market value of a solitary item would usually be higher than the market value of such an item disposed of in the sale of the entire stock of a business.
If there is no identifiable market for a particular item, the courts have been willing to assume that there are willing buyers and sellers.
Taking into account trading stock on hand
How is stock on hand brought to account?
The difference between the value of stock on hand at the start of each year (opening stock), and the value of stock on hand at the end of the year (closing stock) is taken into account. [section 70-35]
The Act does this, in effect, by assessing as income the value of closing stock and allowing a deduction for the value of opening stock.
The overall effect is that a profit on sale of stock is assessable and a loss on sale is deductible.
An item of stock is given the value it had as closing stock at the end of the preceding income year. [section 70-40]
There is a choice of valuing an item at:
- •
- cost;
- •
- market selling value; or
- •
- replacement price. [section 70-45]
If an item of stock is obsolete, or if other special circumstances warrant it, any reasonable lower value can be chosen instead. [section 70-50]
Horse breeding stock has a special value option. [sections 70-60 and 70-65]
There are other conditions if a closing stock item is an interest in a foreign investment fund. [section 70-70]
Natural increase of live stock
What is the 'cost' of live stock acquired by natural increase?
You can choose either:
- •
- The actual cost (ie. the full cost of bringing the animal into its current state and location, including veterinary fees, pasture improvement expenses, etc.); or
- •
- the prescribed cost set by the Regulations for different types of animal. [section 70-55]
What if you dispose of stock outside the ordinary course of business?
The disposal is treated as having occurred at market value and this amount is included in your assessable income [sections 70-90 and 70-95]. This treatment also applies to disposals of certain trees and growing crops. [section 70-85]
Special deduction for standing timber
Normally, a deduction is allowed when you acquire trading stock. As standing timber is not trading stock, the law instead allows a deduction for its cost:
- •
- on disposal of the land;
- •
- on the death of the owner;
- •
- when the trees are felled for sale or manufacture; or
- •
- when someone other than the owner fells the trees under a right granted in return for a royalty. [section 70-120]
What if there is a change in interests?
If the interests in an item of stock change (eg. a partnership takes in a new partner), then the law may treat it as being a disposal outside the ordinary course of business [section 70-100] .
This happens when there is not a complete change in interests but the item ceases to be trading stock of the original entity.
This disposal outside the ordinary course of business would normally be treated as occurring at market value. However, if the item is an asset of the new owners business, and all the owners agree, they can elect to roll it over for the value at which the original entity would have taken it into account at the end of the year. A 25% continuity of interests is required for this election to be available.
What if the owner of trading stock dies?
The owner is treated as having sold it to the legal personal representative for its market value. The representative can elect to roll it over for the value it would have had in the owners hands at the end of the year if the business continues after the death [section 70-105] .
What happens if the stock is lost?
Insurance payments are normally assessed as ordinary income under section 6-5. If any such payments are not ordinary income, they will be assessed on receipt [section 70-115] .
Deferring assessable income from live stock disposals
What special treatment is there for a forced disposal of live stock?
If an unusual disposal of live stock was caused by a specified event (eg. a notifiable disease; loss of pasture due to fire, flood or drought; government resumption of land; contamination), you can elect to spread assessment of any profit over 5 years. [section 385-105]
Alternatively, the profit can be applied over the next 5 years to reduce the tax cost of replacement live stock [sections 385-110 and 385-120] . Another choice is to include in assessable income a nominated amount for animals bred as replacements [section 385-115] . Any profit not accounted for in these ways by the end of the 5 years is assessable in the last year [paragraph 385-110(1)(c)] .
If the disposal is because of bovine tuberculosis
The alternative choice is available over 10 years. [section 385-125]
What is the treatment of insurance recoveries?
A similar election is available for insurance for loss of live stock or loss of trees by fire - assessment can be spread over 5 years. [section 385-130]
What is the treatment for a forced early wool clip?
Another election is available to defer for one year assessment of profit on disposal of a second wool clip in a year, shorn early because of fire, drought or flood. [section 385-135]
What election rules are there?
The election rules are in Subdivision 385-H. The election must be made before lodging the tax return for the year the amount is deferred (or the last of them, if more than one). [section 385-150] The election can't be made after a disentitling event happens. [section 385-160]
These include death, bankruptcy, leaving Australia permanently, or ceasing to carry on the business. [section 385-163]
Who makes elections for partnerships or trusts?
An election for a partnership or trust is made by the partnership or the trustee. [section 385-145]
What is the status of amounts deferred by election?
They are treated as assessable income from carrying on a primary production business when returned as assessable income. [section 385-155]
If a partnership takes over the business of another partnership, it can elect to be treated as a continuation of the old partnership if there is at least a 25% continuity of rights to income. [section 385-165] This means that a partnership can avoid the effects of, say, a new partner being introduced.
Similarly, if an entity puts its business into a partnership with others, the partnership can adopt an election made by that entity. [section 385-170]
B. Discussion of changes
In rewriting the income tax law, many administrative discretions affecting the calculation of tax liability are being replaced with objective tests or specific criteria. This better supports the self assessment system. Discretions in anti-avoidance provisions are being retained where this is necessary to protect the revenue.
Where a discretion is being replaced with more specific criteria, the change is explained in this Explanatory Memorandum. Most changes simply remove references to the Commissioner to make the law objective (eg. what the Commissioner considers reasonable becomes what is reasonable). This material doesn't comment further on those changes.
Section 70-20 Non-arms length purchases
This anti-avoidance section treats an item of trading stock as having been bought for its market value if it is bought in a non-arms length transaction for more than its market value.
Simplifies the law by replacing the precondition that:
- •
- either the purchase price of stock was inflated above an arms length price or the purchase price and delivery costs were above the purchase price and delivery costs for an identical article,
- with the precondition that:
- •
- expenditure on buying, or obtaining delivery of, trading stock was greater than the market value of what the expenditure is for.
The new sections formulation focuses on whether the expenditure (either for buying or obtaining delivery of the stock) is above market value. This is simpler and easier to understand than the complicated and overlapping preconditions in the 1936 Act. It covers the same ground as the original, ie. non-arms length transactions inflating prices above market value.
Simplifies the rules by treating the amount of expenditure on acquiring or obtaining delivery of the stock as being equal to the market value.
The 1936 Act has a complex matrix which depends on whether the Commissioner considers that only the first, only the second, or both preconditions, were satisfied. The new section replaces that matrix with just one outcome- the inflated expenditure is reduced to the market value. This maintains the policy of the original provision but simplifies its expression.
Replaces arms length price with market value .
The rewritten law restricts the use of different terms to express the same idea. For this reason arms length price will be replaced in the new law by market value . Market value is already used in many places in the existing law (including the trading stock provisions) and is largely synonymous with arms length price.
Section 70-40 Value of opening stock
This section specifies that the value of stock on hand at the start of a year (the opening stock) is the same amount that was taken into account as the previous years closing stock.
This ensures that the opening value of each item of stock is always the same as the closing value it had in the previous year. If not taken into account at the end of a year, its opening value at the start of the next year will be nil.
Section 29 of the 1936 Act says that an items opening value is the value ascertained under the Act at the end of the previous year. There are some Board of Review decisions concluding that those words mean that the opening value must be what the previous years closing value should have been . If the previous years assessment cannot be amended because of time limits, its closing value will be different from the next years opening value. This will produce either a windfall gain or an unexpected loss for the taxpayer.
The rewrite avoids the possible problem. If one years closing value is amended, then the next years opening value will change to reflect that amendment. If the closing value cannot be amended, the next years opening value will still be what was recorded as the closing value. Subsection 70-40(2) supports this by ensuring that an items opening value is nil if the items closing value in the previous year was not taken into account at all.
Section 70-45 Value of closing stock
This section explains that a taxpayer can elect to value each item of trading stock on hand at the end of an income year (closing stock) at a choice of cost, market selling value and replacement price.
The rewrite adopts the expression cost instead of cost price and replacement price instead of the price at which it can be replaced .
These are simpler terms. The ideas behind them are unchanged.
The rewrite also uses the word item instead of the word article in the existing law. This does not change the law.
For commodities like petrol and wheat, item means an appropriate unit of measurement.
Where a taxpayer has made a number of purchases of identical items of trading stock at different prices but only disposed of some of that stock, it may be impossible to determine the actual cost of each item of trading stock on hand. This commonly occurs if a taxpayer has a quantity of items which cannot be distinguished from each other. Some accounting methods can be used to determine the cost of stock in these cases provided they produce a true approximation of actual cost and, therefore, of taxable income.
The rules for valuing live stock are being brought in line with those for valuing other trading stock.
The present rules for valuing live stock differ from those for valuing other trading stock in these ways:
- •
- live stock generally can only be valued at cost price or market selling value;
- •
- that choice must be made uniformly for all live stock;
- •
- the method cannot be changed from year to year except with the Commissioners permission;
- •
- the Commissioner has a discretion to allow another value to be used if satisfied that there are circumstances that justify it; and
- •
- if no choice is made, cost price applies.
The Bill will remove those differences. This will allow taxpayers greater flexibility in valuing live stock.
Special rules for working out the cost of natural increase [section 70-55] , and the present extra valuation option for horse breeding stock [sections 70-60 and 70-65] , will remain.
In accordance with self assessment principles, the alternative value that depends on the Commissioners discretion will be replaced by an alternative value that depends on objective tests [section 70-50] . These are the same tests used for all trading stock- obsolescence or other special circumstances. Under the existing discretion, the Commissioner effectively allows stud animals to be depreciated at 20% a year so long as their market selling value is actually declining. Taxpayers will be able to achieve the same result under this proposal by valuing their animals at market selling value.
Section 70-50 Obsolescent stock and special circumstances
This section allows the value of an item of stock to be reduced if it is obsolescent or if other special circumstances warrant.
Under the present law, this reduced value is available if:
- •
- a written request is lodged with the Commissioner;
- •
- the Commissioner is satisfied that the prerequisites are met; and
- •
- the Commissioner sets a value, taking into account 3 listed factors and any other relevant factors.
Under the rewrite, it is a matter of objective fact whether the preconditions exist. If they do, you can set a reasonable value below the standard values, without having to notify the Commissioner.
Consistent with the principles of self assessment, taxpayers will not have to approach the Commissioner to set a different value but will be able to decide if the prerequisites are satisfied and then set a reasonable value.
The listed factors are not needed because they are covered by the requirement that the taxpayers decision be reasonable.
Section 70-55 Cost of natural increase
This section explains how to work out the cost of an animal acquired by natural increase.
The present rules about how to work out the cost price of natural increase are replaced by a simple choice between actual cost and the value prescribed in the Regulations.
The 1936 Act uses a more involved process to work out the cost price of natural increase. It depends on whether there is a prescribed value for the particular type of stock and whether the taxpayer has previously valued that stock at cost price:
| Taxpayer's situation | How to calculate cost price |
|---|---|
| If a value is prescribed for the class of live stock and the taxpayer has previously valued that class at cost price | Taxpayer chooses one of:
|
| If a value is prescribed for the class of live stock but the taxpayer has not previously valued that class at cost price | Taxpayer chooses one of:
|
| If there is no prescribed value for the class of live stock | Actual cost* |
| * Actual cost means the full cost of producing the animal, including both fixed and variable costs. These will include expenses like veterinary fees, fencing, feed, etc. | |
This section will replace that with the taxpayer's choice between actual cost and the prescribed value.
Section 70-100 Items becoming trading stock of a different entity
This section provides for what happens if a partial change of interests in trading stock causes that stock to be held by a different entity (eg. if there is a change in the membership of a partnership that has trading stock).
Replaces the present rule, which:
- •
- treats any change in interests in trading stock as a disposal from the old owners to the new owners,
- with a rule that:
- •
- treats a change of interests as a disposal only if the item stops being trading stock on hand of the owners.
The present rule can cause taxpayers needless trouble by deeming a sale to occur even if there is no change in the taxpayers (eg. if there is a variation in partnership interests but no change in the partners themselves).
This section will only treat the stock as sold by the old owners if there is a new taxpayer.
Section 70-105 Death of an owner of plantation trees
This section provides for the treatment of disposals of trading stock on the owner's death. It applies the same treatment to disposals of trees planted and tended for sale and of crops on the owner's death.
If the owner of a plantation disposes of trees, the 1936 Act allows a deduction for their cost to balance the assessment of their market value (subsection 36(7A)). This section extends that treatment to disposals on the owner's death as long as the deceased's representative does not elect for a nil value.
This section treats the death of the owner as causing a disposal of trees for their market value. However, the personal representative can choose to value them at the value they would have been accounted for at the end of the year if the owner had not died.
If the representative does not make the election, this section will provide the same deduction as would have been available if the owner had disposed of the trees while alive.
The election to value trading stock held at death at other than market value will be made by the legal personal representative instead of by agreement of the trustee of the estate and those beneficiaries liable to be assessed on the income of the business.
This is part of a change to standardise election rules in this part of the law. It is discussed more fully under 'subdivision 385-H and section 70-105, standardised elections', later in this chapter.
Section 70-115 Compensation for lost trading stock
This section will include in assessable income an insurance or indemnity amount if:
- •
- it is for the loss of trading stock; and
- •
- it is not ordinary income.
The rewritten provision will only assess amounts that are not ordinary income.
Insurance and indemnity amounts for the loss of trading stock will generally, and perhaps always, be assessed as ordinary income. If there are any amounts that are not ordinary income, they will be assessable under this provision.
The exclusion of ordinary income makes it clear that the section does not modify the ordinary tax accounting treatment of insurance and indemnity amounts for a loss of trading stock.
Subdivision 385-E Live stock elections and abnormal disposals
This subdivision sets out the elections available to primary producers who are forced to sell some of their live stock (eg. because of a notifiable disease or a loss of pasture to fire or flood). These elections provide concessional treatments for assessment of any profit made on the sale of that live stock.
One election available to primary producers who have to sell some of their live stock because of certain listed circumstances is to spread the assessment of any profit they make over 5 years. This Sub-division will replace the present rules about that election with a simpler set of rules.
The present rules about when primary producers can make an election and the effects of doing so are in the following table:
| Death or disposal caused by | Within ordinary course of business | Is election allowed | If the election is made... | |
|---|---|---|---|---|
| What is assessable? | What amount is spread? | |||
| Yes | No | N/A | N/A | |
| government resuming land | No | Yes | market value | excess over opening value/ purchase price of either:
|
| Yes | No | N/A | N/A | |
| State leasing land for cattle tick eradication | No | Yes | market value | excess over opening value/ purchase price of either:
|
| Yes | No | N/A | N/A | |
| losing pasture or fodder to fire, flood or drought | No | Yes | market value | excess over opening value/ purchase price of either:
|
| certain stock | Yes | Yes | ||
| diseases | No | Yes | return on disposal | excess over opening value/ |
| contamination | Yes | Yes | + compensation | purchase price of (return on disposal |
| notice | No | Yes | + compensation) | |
Under the new Subdivision, the rules about when the election can be made and the effects of making it will be:
| Death or disposal caused by | Within ordinary course of business | Is election allowed | If the election is made... | |
|---|---|---|---|---|
| What is assessable? | What amount is spread? | |||
| any of the listed causes | Yes | Yes | return on disposal + compensation | excess of assessable amount over:
|
| No | Yes | market value + compensation |
|
|
The present law provides for these concessions in two separate provisions (sections 36 and 36AA) which have a very similar operation but with slight differences. The Subdivision standardises the prerequisites and the effects so that the two provisions can be combined [sections 385-100 and 385-105] .
The alternative election will be available in all these cases instead of just in some of them as at present.
In most cases in which taxpayers can elect to spread the profit on a forced disposal of live stock under the existing law, they can defer assessment of the whole profit for up to 5 years. If they do, the profit is effectively taxed by reducing the tax cost of replacement live stock or by including an amount in assessable income for replacement stock they breed.
This election is not currently available for a disposal made because of:
- •
- a resumption of land; or
- •
- a State leasing land under a cattle tick eradication program.
The proposal extends the election to those cases [sections 385-100 and 385-110] .
Will extend both:
- •
- the election to spread profit on a forced disposal; and
- •
- the alternative to defer the whole of the profit for up to 5 years,
to leases of land for cattle tick eradication programs by Territories as well as by States.
Under the present law, primary producers can make these elections if they have to sell live stock because a State leases land for a cattle tick eradication campaign. The law does not allow them to make the elections if a Territory leases the land for the same purpose.
This change will remove an exception for bovine brucellosis that presently exists if a taxpayer makes the alternative election and will vary the formula for accounting for the deferred profit where an election is made in the context of bovine tuberculosis.
An election usually requires the deferred profit to be accounted for within 5 years. However, in the case of 2 diseases - bovine brucellosis and tuberculosis - the period is 10 years. Further, the formula the law uses to reduce the cost price of replacement stock in those 2 cases is different from that for other diseases.
Australia is free of bovine brucellosis, so there is no need for it to be accorded a preferred treatment.
If a taxpayer makes the alternative election, the law provides a formula for reducing the tax cost of purchased replacement live stock. In the remaining exceptional case - bovine tuberculosis - the formula will be the same as for other diseases:
| tuberculosis formula now | proposed |
|---|---|
| unused profit on the disposal/ no. of animals in purchase | profit on disposal/ no. of animals lost |
This will make the law simpler.
Subdivision 385-H and section 70-105 Standardised elections
Subdivision 385-H and section 70-105 set out the rules for making elections under:
- •
- section 70-105 (death of the owner);
- •
- Subdivision 385-E (forced disposals of live stock);
- •
- Subdivision 385-F (insurance recoveries for losses of live stock or trees); and
- •
- Subdivision 385-G (profit on the sale of a second wool clip).
Rules about who makes elections in partnership and trust cases will be standardised with a rule that these elections are always made by the partnership or the trustee [sections 70-105 and 385-145] .
At present, there are 3 election systems for partnerships and trusts. These apply to:
- •
- forced disposal of live stock [sections 36, 36AAA and 36AA] ;
- •
- elections to spread insurance payments for losses of live stock or trees [section 26B] ;
- •
- elections to spread the profit on the sale of a second wool clip forced by fire, flood or drought [section 26BA] ; and
- •
- elections to value trading stock that becomes part of a deceased estate at other than market value [section 37] .
Sometimes each partner and beneficiary can make a separate election. At other times the relevant partners must make a unanimous election. In section 36AAA, only the partnership or the trustee can elect.
Standardising these elections at the partnership and trustee level has these important advantages:
- •
- it simplifies and greatly shortens the election provisions;
- •
- it substantially lowers compliance costs by reducing the number of elections that need to be made; and
- •
- it overcomes confusion about which beneficiaries need to agree that the value of trading stock under a deceased estate should be rolled over.
This change extends to Subdivisions 385-E, F and G the election - available to partnerships that take over the business of another taxpayer - to be treated as a continuation of that other taxpayer [sections 385-165 and 385-170] .
Under section 36AAA, a partnership that takes over the business of another taxpayer can elect to be treated as a continuation of that other taxpayer if there is at least a 25% continuity of interest. This means that an election made by the other taxpayer to defer assessment of the profit on a forced disposal is treated as if it were made by the partnership.
A consequence of standardising elections is that this choice will be available for partnerships for all the various elections under Subdivisions 385-E, 385-F and 385-G.
There will be standard rules for cancelling the effect of an election on the happening of certain events [sections 385-160 and 385-163] .
On the happening of certain events (eg. death or bankruptcy), most of the relevant provisions in the 1936 Act require outstanding amounts of deferred assessable income to be assessed in the income year in which the event happens.
One case out of step is section 26BA. That section also allows the trustee of a deceased estate to make an election to defer for 1 year the profit on the sale of a second wool clip in the year of death, so including that amount in the estate's income of the next year. A consequence of standardising the election rules is that this election could not be made after the death. The profit will be assessable in that year.
C. Provisions of the old law that have not been rewritten
Subsection 26BA(10) allows the Commissioner to amend an assessment at any time to give effect to an election under the section. It was intended to ensure that, if the election to defer assessable income was made after the assessment for the relevant year, it would be possible to amend the assessment to give effect to the election. Now that there is a general power to amend an assessment within 4 years, the provision is unnecessary.
The rewrite will remove a redundant anti-avoidance provision, subsection 36(9), which addresses schemes designed to deem the purchase price of trading stock to be more than its real value. This is now covered by the general anti-avoidance provision, Part IVA, which was not part of the law when sub-section 36(9) was enacted. Sub-section 36(10), which defines a term used in sub-section 36(9), has also not been rewritten.
Subsection 36AAA(19) provides that the last day of a year of income includes the last day of an assessment period of less than a full income year. This provision has not been rewritten because the same effect is achieved by the normal substituted accounting period rules in section 18 of the 1936 Act and by the rules for special assessments in section 168 of that Act.
Subsections 36AAA(25) and 36AA(11) define the term official notification. Those definitions have not been rewritten because the terms ordinary meaning covers the same ground.
Rules that are unnecessary because of standardisation
Subsection 26BA(7), which allows the trustee of a deceased estate to elect to defer for one year the profit on the sale of a double wool clip, has not been rewritten. This change is explained in Part B of this chapter under subdivision 385-H and section 70-105, standardised elections.
Sections 32 and 33, which deal with the valuation of live stock on hand at the end of an income year, have not been rewritten because the valuation of live stock is being brought broadly into line with that for other trading stock. This change is explained in Part B of this chapter under section 70-45, value of closing stock.
D. Transitional arrangements
Part 1 of Schedule 5 of the Tax Law Improvement Bill 1997 will amend the Income Tax (Transitional Provisions) Act 1997 to insert the transitional provisions for the rewritten sections discussed earlier in this Chapter.
Part 1 comprises 2 items which will insert in Chapter 2 of the Income Tax (Transitional Provisions) Act 1997 new Part 2-25, Division 70 and add new Division 385 to Part 3-45. These Divisions set out how and when the rewritten sections apply.
The rewritten provisions in Divisions 70 and 385 of the 1997 Act will generally apply to assessments for the 1997-98 or later income years. [Schedule 5, Part 1: sub-sections 70-1(1) and 385-135(1) and section 385-130, Transitional Provisions Act]
However, there are some provisions that will apply to transactions occurring on or after 1 July 1997. There are 2 categories of such provisions. The first is provisions that affect 2 or more parties to a transaction. Because either of those parties may have a substituted accounting period, the transaction may be in a different income year for each of them. The second category is provisions that link with provisions in the first category.
The provisions in Schedule 1 that will apply to events on or after 1 July 1997 are:
- •
- section 70-20 (non-arms length purchase of trading stock);
- •
- sections 70-90 and 70-95 (disposal of trading stock outside the ordinary course of business);
- •
- section 70-100 (partial change of ownership of trading stock);
- •
- section 70-105 (death of the owner of trading stock); and
- •
- Sub-division 385-E (spreading or deferring profit on a forced disposal of live stock).
In many cases, it is necessary to specify in the transitional provisions how the rewritten provisions apply if certain events have happened before the 1997-98 income year of at least one of the parties involved.
This table explains those events and how the transitional provisions apply to them:
| Transitional sections | Event that can happen before the 1997-98 income year | Treatment |
|---|---|---|
| 70-40 | Value of closing stock in 1996-97. | The 1997-98 opening stock has the value of the 1996-97 closing stock, worked out under the 1936 Act. |
| 70-55 | Natural increase of live stock born before 1997-98. | Their cost is worked out under section 34 of the 1936 Act. |
| 70-70 | Interest in a FIF was trading stock at the start of 1991-92. | That interest always has the value it had then unless the market value election applies. |
| Taxpayer elects to use market value for all interest in FIFs | Applies as if the election were made under the 1997 Act. | |
| 70-100 | Deemed disposal and purchase because of a change in ownership of trading stock. | If either party is in its 1996-97 income year, an election to treat the stock as disposed of at its trading stock value, instead of its market value, would use the trading stock values under the 1936 Act. |
| 70-105 | Deemed disposal and purchase because of the death of the owner of trading stock. | If the entity on whom the stock devolves is in its 1996-97 income year, an election to treat the stock as disposed of at its trading stock value, instead of its market value, would use the trading stock values under the 1936 Act. |
| 70-115 | Loss of insured trading stock. | The 1997 Act applies to amounts received in the 1997-98 or a later income year. |
| Insurance or indemnity amount for a loss of trading stock is assessable. | The 1997 Act does not apply to an amount assessable in the 1996-97 or an earlier income year. | |
| 385-130 | Loss of insured live stock or trees. | The 1997 Act applies if the insurance recovery would be assessable in the 1997-98 or a later income year. |
| 385-135 | Election in 1996-97 to defer assessing the profit on the sale of an earlier than normal wool clip. | The 1997 Act applies if the proceeds of selling 2 wool clips would be assessable in the 1997-98 or a later income year. |
| Deferral elections made under the 1936 Act are treated as made under the 1997 Act. |
E. Consequential amendments
Amendment of the Income Tax Assessment Act 1997
Part 2 of Schedule 5 to the Bill will amend the 1997 Act to:
- •
- update references to provisions in the 1936 Act that have been rewritten in Divisions 70 and 385 in Schedule 1; and
- •
- insert additional definitions in the Dictionary in section 995-1 of terms that are used in the rewritten provisions.
Section 10-5 of the 1997 Act lists all the provisions of the current law (in both the 1936 and 1997 Acts) that deal with particular kinds of assessable income. Section 12-5 lists all the provisions that deal with particular types of deduction. Part 2 of Schedule 5 to the Bill will update references to existing provisions that have been rewritten in Divisions 70 and 385 in Schedule 1, so that those lists refer to the rewritten provisions [Schedule 5, Part 2: items 3 to 12, 15 to 19] .
Part 2 of Schedule 5 will also add further references to timber to those lists to accommodate changes to the law [Schedule 5, Part 2: items 13, 14, 20] .
Part 2 of Schedule 5 will update other references to 1936 Act provisions rewritten in Divisions 70 and 385. Two of these will add a reference to a rewritten provision where a reference to the 1936 Act provision currently appears [Schedule 5, Part 2: items 21, 22] .
References to both existing and rewritten provisions are needed where the provision of the 1936 Act has some continuing operation.
A reference to a provision of the 1936 Act is being replaced with a reference to the rewritten provision [Schedule 5, Part 2: item 23] .
Part 2 of Schedule 5 to the Bill will include in the Dictionary (section 995-1 of the 1997 Act) new definitions of terms used in Divisions 70 and 385.
In some cases terms used and their meaning have not changed. The following definitions fall into this category:
FIF [Schedule 5, Part 2: item 29] ;
Foreign investment fund [Schedule 5, Part 2: item 30] ;
Live stock [Schedule 5, Part 2: item 33] ; and
Notional accounting period [Schedule 5, Part 2: item 34] .
Definitions that have changed and new defined terms that Part 2 of Schedule 5 will add to the Dictionary are explained below:
New Definition: Consideration receivable [Schedule 5, Part 2: item 25]
Commentary: In the context of trading stock changing hands, the meaning is the same as the existing law.
The meaning to do with disposals of leased cars is changed slightly. This is discussed under section 20-115, working out the profit on the disposal in Part B of Chapter 4 of this Explanatory Memorandum.
New Definition: Cost [Schedule 5, Part 2: item 26] .
Commentary: For trading stock, this term has the same meaning as cost price in the existing law except for a difference relating to natural increase of live stock (see discussion under section 70-55, cost of natural increase in Part B of this chapter).
The meaning of cost for depreciation purposes is discussed under sub-division 42-B, cost of plant and section 42-65, how to work out your cost in Part B of Chapter 8 of this Explanatory Memorandum.
New Definition: Disentitling event [Schedule 5, Part 2: item 27] .
Commentary: This expression covers the existing events (eg. bankruptcy) that bring an end to the period for which some provisions defer assessable amounts.
New Definition: Disposal year [Schedule 5, Part 2: item 28] .
Commentary: A new label used in the provisions allowing primary producers to defer the assessment of profits on forced disposals or death of live stock. It replaces the existing terms the year to which the election relates, the year of income in which the live stock were disposed of and the year of income in which the live stock died or was destroyed or disposed of.
New Definition: Horse opening value [Schedule 5, Part 2: item 31] .
Commentary: A new label replacing the existing term opening value in the trading stock valuation rules for horses.
New Definition: Horse reduction amount [Schedule 5, Part 2: item 32] .
Commentary: A new label replacing the existing term reduction amount in the trading stock valuation rules for horses.
New Definition: Primary production business [Schedule 5, Part 2: item 35]
Commentary: A new term that will replace the existing definition of primary production.
The concept of a business has been added to the definition because, in all the rewritten parts of the 1936 Act, primary production is only used in the wider concept business of primary production.
Other than that addition, there is no difference in meaning between the existing definition of primary production and the new definition of primary production business.
However, there have been some changes in structure and wording to bring the definition up to date and to make it more user friendly:
Defined terms within the definition have been removed
The defined terms fishing operations (incorporating pearling operations ), forest operations and horticulture have been removed from the definition
These concepts will be fully incorporated into the definition:
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- fishing operations is covered by paragraph (d);
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- pearling operations is covered by paragraphs (d) and (e);
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- forest operations is covered by paragraphs (f), (g) and (h); and
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- horticulture is covered by paragraph (a).
The defined term horticulture has been removed to make it possible to combine, in paragraph (a), the existing paragraphs dealing with the similar concepts, 'cultivation of land' and 'horticulture.'
The other defined terms have been removed because they will not be used in the new law.
The language has been simplified
'Crustaceans and aquatic molluscs' in paragraph (d) of the definition replaces crustacean or oysters or other shellfish. 'Shellfish' is an outdated term, which broadly refers to aquatic crustaceans and molluscs.
'Aquatic molluscs' also covers the existing expressions 'trochus' and 'green snails'.
Unnecessary parts of the definition have been removed
The existing reference to 'poultry' is now covered by 'animals' in paragraph (b) of the definition.
The present exclusion of whaling does not appear in the definition. This does not change the law, however, because whales are not fish, turtles, dugong, beche-de-mer, crustaceans or aquatic molluscs. Therefore, there is nothing in the inclusive part of the definition that could make whaling a primary production business.
New Definition: Proceeds of the disposal or death [Schedule 5, Part 2: item 36] .
Commentary: A label for a combined definition of the following terms from the 1936 Act: proceeds of the sale of the live stock, proceeds of the disposal of the live stock and proceeds of the death of the live stock. There are some minor changes in coverage (see discussion under sub-division 385-E, live stock elections and abnormal disposals in Part B of this Chapter).
New Definition: Proceeds of the sale of 2 wool clips [Schedule 5, Part 2: item 37] .
Commentary: A new term for an undefined idea already in the 1936 Act.
New Definition: Reduction amount [Schedule 5, Part 2: item 38] .
Commentary: A new label for the existing term the amount applicable in relation to the animal used in the provisions allowing primary producers to elect to defer assessment of the profit on a forced disposal or death of live stock.
New Definition: Tax profit on the disposal or death [Schedule 5, Part 2: item 39] .
Commentary: A new label used in the provisions allowing primary producers to defer the assessment of profits on forced disposals or deaths of live stock. It replaces these terms in the 1936 Act: profit on the disposal of the live stock, profit on the death of the live stock, profit arising in respect of the death of the live stock and profit arising in respect of the disposal of the live stock.
New Definition: Trading stock [Schedule 5, Part 2: item 40] .
Commentary: An expression from the 1936 Act. One minor change was to replace the expression acquired or purchased with the single word acquired on the basis that it covers the same ground as the longer expression.
New Definition: Unused tax profit on the disposal or death [Schedule 5, Part 2: item 41] .
Commentary: A new label for reduced profit on the disposal or death of the live stock.
New Definition: Value (of an item of trading stock) [Schedule 5, Part 2: item 42] .
Commentary: A label for an undefined idea already in the 1936 Act.
The consequential amendments made by Part 2 of Schedule 5 generally apply to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to trading stock.
The application of the amendment which replaces the reference to section 26BA in subsection 165-60(4) with a reference to section 385-135 [Schedule 5, Part 2: item 23] does not apply until assessments for the 1998-99 and later income years [Schedule 5, Part 2: item 24] . This is because subsection 165-60(4) refers to an amount being included in assessable income by section 26BA. Section 26BA will still do that in 1997-98. Section 385-135 will only begin including amounts in assessable income in 1998-99.
Amendment of the Income Tax Assessment Act 1936
Part 3 of Schedule 5 to the Bill will amend the 1936 Act to:
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- insert references to the provisions rewritten by Divisions 70 and 385 in Schedule 1 where the 1936 Act currently refers to the existing provisions;
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- close off the application of provisions of the 1936 Act that have been rewritten in those Divisions, so that the existing provisions generally apply only to the 1996-97 and earlier income years;
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- replace the 1936 Act definition of trading stock with the 1997 Act definition; and
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- modify the application of the capital gains provisions to disposals of trading stock.
Inserting references to rewritten provisions
Part 3 of Schedule 5 will insert in the 1936 Act references to the rewritten provisions contained in Divisions 70 and 385 where the 1936 Act currently refers to the existing provisions. There are two categories of these amendments as discussed below.
The first will add a reference to a rewritten provision where a reference to the equivalent 1936 Act provision currently appears [Schedule 5, Part 3: items 71 to 73, 76 to 78, 80, 82, 83, 86] .
A similar reference to rewritten provisions in Divisions 70 and 385 is being made by Schedule 9 to the Bill [Schedule 9, Part 3: item 16] .
Dual references to existing and rewritten provisions are required where the provisions being consequentially amended:
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- have not yet been rewritten and closed off; and
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- can apply to amounts relating to more than one income year (including an income year before the 1997-98 income year).
The second category will replace a reference to an existing provision in a section of the 1936 Act with a reference to the rewritten provision [Schedule 5, Part 3: items 44, 63, 68, 69, 74, 75, 79, 81, 84, 85, 87, 88] .
This is necessary where the section of the 1936 Act:
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- has not yet been rewritten and closed off; and
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- can apply to amounts that relate to only one income year at a time, being the 1997-98 or a later income year.
Closing off the application of existing provisions
Part 3 of Schedule 5 will insert new provisions into the 1936 Act that will close off the application of existing provisions that have been rewritten or are redundant [Schedule 5, Part 3: items 45 to 62, 64] .
Part 3 of Schedule 2 will also close off the application of an existing provision rewritten in Division 70 [Schedule 2, Part 3: item 20] .
In these cases, the existing provisions need to be closed off so that they only apply to the 1996-97 and earlier income years. In some cases, they are closed off so that they only apply to transactions occurring on 30 June 1997 or earlier. This complements the transitional provisions in Part 1 of Schedule 5, which ensure that the corresponding rewritten provisions apply to the 1997-98 and later income years or to transactions occurring on 1 July 1997 or later.
Part 3 of Schedule 2 will also make some further minor changes to the 1936 Act to reflect changes made by closing off other provisions [Schedule 5, Part 3, items: 65, 66, 67, 70] .
Part 3 of Schedule 5 will replace the definition of trading stock in the 1936 Act with a definition adopting the definition in the 1997 Act [Schedule 5, Part 3: item 43] .
The consequential amendments made by Part 3 of Schedule 5 generally apply to assessments for the 1997-98 and later income years [Clause 4, Tax Law Improvement Bill 1997] . This ensures that these consequential amendments take effect at the same time as the rest of the amendments relating to trading stock.
Amendment of other Commonwealth legislation
Part 4 of Schedule 5 to the Bill will add references to rewritten provisions contained in Division 70 in Schedule 1, to these Commonwealth Acts:
| Commonwealth Act | Amended by |
|---|---|
| Cattle Transaction Levy Act 1995 | Schedule 5, Part 4: item 89 |
| Financial Corporations (Transfer of Assets and Liabilities) Act 1993 | Schedule 5, Part 4: items 90 to 93 |
The consequential amendment made to the Cattle Transaction Levy Act 1995 by Part 4 of Schedule 5 applies to assessments for the 1997-98 and later income years [clause 4, Tax Law Improvement Bill 1997] .
The consequential amendments made to the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 by Part 4 of Schedule 5 apply to the 1997-98 and later years of income. Two of the amendments also apply to the 1996-97 income year. This is because they insert references to provisions that apply on or after 1 July 1997, which could be in the 1996-97 income year for some taxpayers. [Schedule 5, Part 4: item 94]