ATO ID 2003/357: Trading stock value: disposal by exempt entity - outside ordinary course of business
Date of decision: 9 April 2003
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
Is a taxpayer who acquires an item of trading stock from a tax exempt entity that disposed of it outside the ordinary course of its business, treated as having bought the item for its market value for the purposes of section 70-95 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. A taxpayer who acquires an item of trading stock from a tax exempt entity that disposed of it outside the ordinary course of its business, is treated as having bought the item for its market value for the purposes of section 70-95 of the ITAA 1997.

Facts
The taxpayer is fully owned by a tax exempt entity. It took over the business of the tax exempt entity. All assets (including trading stock) were transferred to the taxpayer.

Reasons for decision
Summary: Section 70-95 of the ITAA 1997 states: If an entity disposes of an item of the entity's trading stock outside the ordinary course of business, the entity acquiring the item is treated as having bought it for the amount included in the disposing entity's assessable income under section 70-90. Sub-section 70-90(1) of the ITAA 1997 states: If you dispose of an item of your trading stock outside the ordinary course of a business: (a) that you are carrying on; and (b) of which the item is an asset The tax exempt entity disposed of its trading stock outside the ordinary course of its business. A literal reading of sections 70-90 and 70-95 of the ITAA 1997 may suggest that the taxpayer is treated as having bought the trading stock for a nil amount on the basis that the entity from which they acquired the trading stock is exempt from tax and includes no amount in its assessable income under section 70-90. However, in Federal Commissioner of Taxation v. Angus (1961) 105 CLR 489; (1961) 12 ATD 277 the High Court looked at the interaction between paragraph 23(q) (an exempting provision that has now been repealed) and subsection 97(1) of the Income Tax Assessment Act 1936 . At pp515-516 Menzies J stated (at CLR 515-516): The argument ran that what is included in assessable income of a taxpayer cannot be exempt income. It is, however, commonly found in the Act that the assessable income of a taxpayer shall include certain things: see ss. 26 and 44. This form of words, however does not mean that special provisions such as s. 23 (q) can have no application, and indeed, the contrary was decided in Reid v Federal Commissioner of Taxation . The meaning of a general provision that something shall be included in the assessable income of a taxpayer is always subject to any particular provision which would exempt that income from income tax . [emphasis added] In view of this the tax exempt organisation will include in its assessable income the market value of the items of trading stock disposed of (section 70-90 of the ITAA 1997), notwithstanding that its income will be exempt under section 50-1 of the ITAA 1997. Accordingly, section 70-95 of the ITAA 1997 will apply to treat the taxpayer as having bought the trading stock for its market value.

Legislative references: Income Tax Assessment Act 1936 paragraph 23(q) (repealed) subsection 97(1)
Case references: Federal Commissioner of Taxation v. Angus (1961) 105 CLR 489 (1961) 12 ATD 277
Subject references: Disposal of trading stock Exempt entities