ATO ID 2002/625: Disposal of Trading Stock
Date of decision: 11 March 2002
Year of income: Year ending 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Can the election under subsection 70-100(4) of the Income Tax Assessment Act 1997 (ITAA 1997) be exercised in respect of trading stock, distributed to beneficiaries on winding up of a deceased estate, so that the trading stock is brought to account at its closing value rather than its market value?

Decision
No. The election under subsection 70-100(4) of the ITAA 1997 cannot be exercised.

Facts
The assets of a deceased estate included a large parcel of land. The executors of the estate commenced a business of land subdivision in which the subdivided lots were treated as trading stock. The executors, having administered the estate for a number of years, decided to transfer the remaining lots as an in specie distribution to the beneficiaries of the deceased estate, so that the estate could be wound up.

Reasons for decision
Summary: In order for an election to be made under subsection 70-100(4) of the ITAA 1997, there must first be a partial change in the ownership of an item of trading stock. Immediately after the change, the entity that held the item must no longer be the item's sole owner but must still retain an interest in the item in accordance with subsection 70-100(1) of the ITAA 1997. An entity includes a trust, a trustee and a beneficiary in accordance with section 960-100 of the ITAA 1997. Thus, it must be determined which entity (the trust, the trustee and/or the beneficiaries) held an ownership interest in the land before its transfer and which, if any, held an interest after the transfer. While it is accepted that the beneficiaries of the deceased estate have a beneficial interest in the assets of the deceased estate whether fully administered or not, the legal ownership of the trust property prior to the transfer is in the trustee who holds it for the benefit of the beneficiaries. Thus, it is considered that the beneficiaries cannot be said to own the trading stock prior to the transfer. After the transfer, the trustee who held ownership of the land previously has not retained an interest in it. The land is owned entirely by the beneficiaries to whom it has been transferred. Therefore, as the conditions of subsection 70-100(1) of the ITAA 1997 have not been satisfied, the election under subsection 70-100(4) of the ITAA 1997 cannot be exercised.

Legislative references: Income Tax Assessment Act 1997 section 960-100 subsection 70-100(1) subsection 70-100(4)
Subject references: Disposal of trading stock Trading stock valuation Deceased estates