ATO ID 2011/23: Trading stock: natural increase - relevance of survival rates
Date of decision: 3 March 2011
Year of income: Year ended 30 June 2010
Business line: Private Groups and High Wealth Individuals

Issue
When will Atlantic salmon bred in a land-based nursery as part of an aquaculture business become an 'animal that you hold as live stock' for the purposes of section 70-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Atlantic salmon bred in a land-based nursery as part of an aquaculture business become an 'animal you hold as live stock' for the purposes of section 70-55 of the ITAA 1997 when they reach the 'fry' stage of development.

Facts
The taxpayer conducts an aquaculture business producing Atlantic salmon for sale. The operations of the business are carried out at a land-based nursery and at sea farms. Each brood female produces about 3000 eggs which are fertilised and incubated in the nursery. The hatched offspring go through a number of distinct growth stages: The ordinary survival rates in the taxpayer's aquaculture operations during the hatching and development stages up to transfer are:

Reasons for decision
Summary: Division 70 of the ITAA 1997 provides special rules to account for trading stock for income tax purposes. Its key features are described in section 70-5 of the ITAA 1997. The purpose of these rules is to produce an overall result that properly reflects trading stock activities during the income year. As explained by Professor Ross Parsons in Income Taxation in Australia (1985) at page 792 (paragraph [14.1]): Allowing a deduction of an outlay that is the cost of trading stock would bring about an unacceptable distortion in the operation of the Assessment Act, were it not for the provisions of s. 28 [now section 70-35 of the ITAA 1997]. That section in its most common operation will negative the allowance of the deduction by bringing in a like amount as income, if the item of stock has not been disposed of by the end of the year of income. In effect, the deduction of cost is deferred till the year of income in which the stock is realised and there is a matching receipt of assessable income. Trading stock is defined in section 70-10 of the ITAA 1997 to include live stock, which may include aquatic species, for example, freshwater crayfish ( Taxation Determination TD 2017/7 ) and abalone ( ATO Interpretative Decision 2003/44 ). Subsection 70-55(1) of the ITAA 1997 provides for the cost of an 'animal you hold as live stock' that you acquired by natural increase. 'Live stock' is defined in section 995-1 of the ITAA 1997 not to include animals used as beasts of burden or working beasts in a business that is not a primary production business (this definition is essentially unchanged from the former definition in subsection 6(1) of the Income Tax Assessment Act 1936 ). In Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105; [1951] HCA 66: (1951) 9 ATD 337; (1951) 5 AITR 214, the High Court considered the former definition, holding that, by inference, it includes all animals used in a business of primary production (at CLR 110, per Dixon and Fullagar JJ). Carrying on a primary production business is defined in section 995-1 of the ITAA 1997 to include carrying on a business of 'maintaining animals for the purpose of selling them or their bodily produce (including natural increase)'. The Macquarie Dictionary relevantly defines 'maintain' to mean 'to keep in existence'; 'preserve' and 'to provide with the means of existence'. In relation to living things this includes the provision of food and other necessities for life and growth. The carrying on of a business requiring the maintenance of animals as live stock, therefore, assumes there to be a stable population of those animals and that a large proportion of them are not expected to be lost due to ordinary mortality factors. This view is consistent with the purposes of the trading stock provisions, which effectively defer a deduction for the cost of acquiring an animal as live stock, including by natural increase, until the animal is sold. For these reasons, the ordinary survival rates of progeny in a business of primary production are a relevant consideration in determining when the progeny becomes an 'animal you hold as live stock' acquired by natural increase for the purposes of section 70-55 of the ITAA 1997. In this case the taxpayer breeds Atlantic salmon in a land-based nursery as part of an aquaculture business, which is a primary production business. The animals the taxpayer maintains are live stock for the purposes of Division 70 of the ITAA 1997. The fry stage is when juvenile Atlantic salmon become free-feeding and take on the appearance of small fish. At this point they are transferred to tanks and the period of rearing and maintenance begins. From the information supplied by the taxpayer, from the fry stage the mortality rates of the juvenile fish are low and the population has stabilised to reflect the number of fish that will be held for sale. For these reasons, Atlantic salmon bred in a land-based nursery as part of an aquaculture business become an 'animal you hold as live stock' for the purposes of section 70-55 of the ITAA 1997 when they reach the 'fry' stage of development.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1)
Case references: Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 [1951] HCA 66 (1951) 9 ATD 337 (1951) 5 AITR 214
Related public rulings and determinations: Taxation Determination 2017/7
Related ATO interpretative decisions: ATO ID 2003/44 | ATO ID 2003/726
Other references: Parsons, R 1985 Income Taxation in Australia Law Book Co Ltd, Sydney The Macquarie Dictionary [Online]
Subject references: Livestock breeding Trading stock Livestock natural increase