Edited version of private advice

Authorisation Number: 1051848227444

Date of advice: 7 July 2021

Ruling

Subject: Income tax - trading stock

Question

Can the trading stock be transferred from a Partnership to a Trust be valued at cost instead of market value, using an election made under section 70-100(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The following entities own the breakdown of livestock normally depastured on a property owned by Entity 3:

•         Partnership - 80%

•         Trust - 20%

The Trust brought into the partnership. A new partnership agreement was drawn up and the partnership has been reconstituted with the following partnership split:

•         Entity 1 - 11%

•         Entity 2 - 11%

•         Entity 3 - 3%

•         Entity 4 - 75%

All entities would be of the same family group.

All parties have agreed to transfer the livestock from the Partnership to the Trust and to elect that Section 70-100(4) apply in relation to the transfer.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 70-90

Income Tax Assessment Act 1997 Section 70-100

Income Tax Assessment Act 1997 Subsection 70-100(4)

Income Tax Assessment Act 1997 Subsection 70-100(6)

Reasons for decision

Election under subsection 70-100(4) of the ITAA 1997

Section 70-90 of the ITAA 1997 states that where an item of trading stock is disposed of outside the ordinary course of a taxpayer's business, the market value of that trading stock is included in the assessable income of the entity which disposes of the trading stock.

Section 70-100 of the ITAA 1997 provides that trading stock is treated as having been disposed of outside the ordinary course of business if it stops being trading stock of an entity and, immediately afterwards, that entity is not the sole owner of the trading stock but still has an interest in that trading stock either alone or with others.

An election under subsection 70-100(4) of the ITAA 1997 has the effect that the value to be taken into account for the purposes of section 70-100 of the ITAA 1997 is, instead of market value, what would have been the value of the item as trading stock of the transferor on hand if the year of income had ended on the day of the change.

Subsection 70-100(6) of the ITAA 1997 outlines the conditions for the election and states:

70-100(6) This election can only be made if:

(a)  immediately after the item stops being trading stock on hand of the transferor, it is an asset of a business carried on by the transferee; and

(b)  immediately after the item stops being trading stock on hand of the transferor, the entities that owned it immediately beforehand have (between them) interests in the item whose total value is at least 25% of the item's market value on that day; and

(c)   the value elected is less than market value; and

(d)  the item is not a thing in action.

Immediately after the item stops being trading stock on hand of the transferor, it is an asset of a business carried on by the transferee.

Paragraph 70-100(6)(a) of the ITAA 1997 is satisfied as the livestock became an asset of the business carried on by the new owners, the Trust.

Immediately after the item stops being trading stock on hand of the transferor, the entities that owned it immediately beforehand have (between them) interests in the item whose value is at least 25% of the item's market value on that day.

The Partnership held 80% of the livestock and the Trust held 20% of the livestock.

Although the partnership has been reconstituted, and the partnership interests altered, exactly the same entities that own the livestock before the transfer will own 100% of the ownership interests in the livestock after the transfer.

Therefore, exactly the same entities will have ownership interests of 100% of the value of the livestock on the day of transfer. For the purposes of this ruling it is assumed that the value of the livestock is at least 25% of the market value of the cattle on that day. As such, paragraph 70-100(6)(b) of the ITAA 1997 is satisfied.

The value elected is less than market value.

For the purposes of the ruling, it is assumed that the value elected is less than the market value and this is the purpose for applying for the election. Paragraph 70-100(6)(c) of the ITAA 1997 is satisfied.

The item is not a thing in action.

A thing in action is not defined in the Act but it is intended to have the same meaning as a 'chose in action'. The general law meaning of a chose in action includes shares, debentures and company securities.

Paragraph 70-100(6)(d) of the ITAA 1997 is satisfied as the livestock, which is the trading stock in this case, are not a thing in action.

Conclusion

As all the conditions pursuant to subsection 70-100(6) of the ITAA 1997 have been satisfied, an election can be made pursuant to subsection 70-100(4) of the ITAA 1997.

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