Private ruling: Income Tax: Trading stock - livestock
Published: July 2012
Ruling period: Income year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Do the poultry you hold as breeders in your business of growing and slaughtering for sale and subsequent human consumption constitute trading stock for the purposes of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. The breeders in your business of growing and slaughtering the livestock for sale and subsequent human consumption are livestock and therefore trading stock under paragraph 70-10(b) of the ITAA 1997. | Q2: Is the market selling value methodology acceptable as complying with the market selling value under section 70-45 of the ITAA 1997? | A2: Yes. The market selling value is acceptable as complying with the market selling value under section 70-45 of the ITAA 1997.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You, X Pty Ltd, operate a business of growing and slaughtering certain livestock for sale and subsequent human consumption. You own that livestock which are termed 'breeders'. The 'breeders' are held on farms. The produce is taken to the hatchery where they are held under a controlled incubation process to the point of hatching. The livestock is then sold to contract farmers at an agreed fixed priced determined under contract. The farmers take ownership of the livestock at that point. You purchase the livestock back off the farmers when they have reached age maturity. This purchase occurs when they are taken to the slaughter house premises for slaughter (i.e. you take ownership back and slaughter on the same day). The carcass is then packaged and stored in freezers and then on sold to customers. The breeders are kept and maintained for a specified number of weeks in the egg production process, at which point they generally reach the end of their effective production life. The breeders are then generally slaughtered and sold. The only use or market for the breeders at the end of their production life is to be sold. Otherwise they would be killed and disposed of for nothing.

Relevant legislative provisions: Income Tax Assessment Act 1997 paragraph 70-10(a) | Income Tax Assessment Act 1997 paragraph 70-10(b) | Income Tax Assessment Act 1997 subsection 70-45(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The livestock you hold as breeders in your business of growing and slaughtering them for sale and subsequent human consumption are livestock and therefore trading stock under paragraph 70-10(b) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 70-10 of the ITAA 1997 states that trading stock includes: · anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and · live stock. The use of the word 'includes' in the definition of trading stock in section 70-10 of the ITAA 1997 signifies that a thing may be trading stock for the purposes of the provision if it meets the requirements in paragraphs 70-10(a) or 70-10(b) of the ITAA 1997 or is otherwise trading stock within the ordinary meaning of that term. Livestock is defined in subsection 995-1(1) of the ITAA 1997 to not include animals used as beasts of burden or working beasts in a business other than a primary production business. In Riddle v FC of T (1952) 9 ATD 391, McTiernan J referred (p 395) to the Oxford Dictionary definition of beast as '' 'an animal used in riding, driving' etc, as the horse and ass'' and a beast of burden as '' 'a yoke beast', a draught animal''. In that case, it was considered that a racehorse which was trained and kept for racing was a working beast used in a business other than primary production because it was common usage to say that a racehorse was 'in work'. However, the High Court did not go further to explain what would make a beast, which is not a horse, a working beast. Case V144 88 ATC 906; AAT Case 4609 (1988) 19 ATR 3880 is helpful in this respect. In that case, an observation was made that: If dogs are used to provide security for business premises against intruders, there is no reason in principle why they should not be considered as 'working beasts' or 'plant', as much serving the productive functions of the business as any piece of inanimate equipment. Animals in tourist parks might be considered working beasts. In FCT v. Wade (1951) 84 CLR 105; (1951) 9 ATD 337; (1951) 5 AITR 214 ( Wades Case ) the High Court considered that this definition infers that all animals used in a primary production business are included as live stock. A primary production business is defined in section 995-1(1) of the ITAA 1997 to include a business of maintaining animals for the purpose of selling them or their bodily produce (including natural increase). | Detailed Reasoning - Application to your circumstances: You own this livestock which you hold for the purpose of producing. The livestock is held under a controlled incubation process to the point of hatching at which point they are sold to contract farmers. You purchase them back from the farmers when they have reached age maturity. This purchase occurs when they are taken to the slaughter house premises for slaughter. The carcass is then packaged and stored in freezers and then on sold to customers. The breeders are generally slaughtered and sold at the end of their effective production life. The breeder livestock is not trading stock under paragraph 70-10(a) of the ITAA 1997 because, even though they are eventually sold at the end of their effective production life, they are not held for the purpose of sale or exchange in the ordinary course of your business. The breeder livestock may however be trading stock under paragraph 70-10(b) of the ITAA 1997 if they are livestock for the purposes of that paragraph. It is considered that the breeder livestock are not beasts of burden nor can they be described as working beasts. Accordingly, the breeder poultry will be livestock and therefore trading stock under paragraph 70-10(b) of the ITAA 1997. | Summary: The market selling value methodology is acceptable as complying with the market selling value under section 70-45 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 70-45 of the ITAA 1997 requires that each item of trading stock on hand at the end of the income year be valued at its cost, its market selling value or its replacement value. It is noted that an items market selling value is not necessarily the same as its market value. There is no legislative definition of market selling value. However, we can consider various sources of commentary and case decisions relating to the definition of market selling value for income tax purposes. Market selling value does not mean the amount realisable as the result of a break up or forced sale but contemplates a sale or sales in the ordinary course of the taxpayer's business: Brigg, Neumann & Co v IR Commrs (1928) 12 TC 1191 per Rowlatt J at p 1202; Australasian Jam Co Pty Ltd v FC of T (1953) 88 CLR23; 10 ATD217 at p221. In Australasian Jam Co Pty Ltd C FCT (1953) 88 CLR 23 (Australasian Jam) , Fullagar J considered the expression in the ordinary course of the taxpayers business. At paragraph 28 Fullagar J stated: But it is not supposed that the expression market selling value contemplates a sale on the most disadvantageous terms conceivable. It contemplates, in my opinion, a sale or sales in the ordinary course of the companies business such sales are in fact effected. Such expressions in such provisions must be interpreted in a common sense way with due regard to business realities, and it may well be it is not necessary to decide the point that, in arriving at market selling value, it is legitimate to make allowance for the fact that normal selling will take place over a period. But the supposition of a forced sale on one particular day seems to me to have no relation to business reality. In this case it is considered that the breeder livestock are live stocks under paragraph 70-10(a) of the ITAA 1997 and are trading stock under paragraph 70-10(b) of the ITAA 1997. Therefore, based on the above information, it is our view that market selling value is the value determined by the taxpayer's relevant market i.e. the taxpayer's own selling market.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA, apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax .