Private ruling: Valuation of trading stock
Date of advice: 30 June 2015
Published: June 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 20XX

Ruling: Question and answer | Can you use section 70-30 of the Income Tax Assessment Act 1997 to value your trading stock for the business at the time you became a permanent resident of Australia? | Yes.

Relevant facts and circumstances: You were previously a non-resident of Australia. You moved to Australia and became a resident for tax purposes. You were a temporary resident of Australia and were subsequently granted permanent residency. You have been in business as a share and derivative trader for many years. Most of your shares and bonds are managed and traded by a foreign fund manager as your agent. All of the contracts are signed offshore and all decisions are made by the fund manager offshore. At the time you became a permanent resident, you had a portfolio of shares and bonds (managed by the foreign fund manager) which were trading stock on the basis that they were acquired for purposes of sale in the ordinary course of business. These shares and bonds were subsequently disposed of during the ordinary course of business.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 70-30 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 4-15 | Income Tax Assessment Act 1997 section 768-910 | Income Tax Assessment Act 1997 section 768-915

Reasons for decision: Summary: Section 70-30 of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you start holding as trading stock an item you already own, but do not hold as trading stock, you are treated as if: a) just before it became trading stock, had sold the item to someone else (at arm's length) for whichever of these amounts you elect: • its cost (as worked out under subsection (3) or (4)); • its market value just before it became trading stock; and b) you had immediately bought it back for the same amount. In order for the section to apply, you must start holding as trading stock an item you already own. On a literal interpretation, you fail to satisfy this test because the items were trading stock prior to you becoming a permanent resident of Australia. As such, no cost will be allocated to the trading stock, resulting in you being denied a deduction under section 8-1 of the ITAA 1997. A literal interpretation of an Act is inappropriate where it '… does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions' ( Cooper Brookes (Wollongong) Pty Ltd v. Federal Commissioner of Taxation (1981) 147 CLR 297 at p 321). The sale of the trading stock will generate assessable income. In these circumstances the denial of a deduction for trading stock does not conform to the overall intention of the ITAA 1997 which imposes income tax on taxable income i.e. assessable income less deductions (section 4-15 of ITAA 1997). A more appropriate interpretation of the section is that the reference to 'trading stock' is limited to trading stock of a business subject to Australian income tax. In your case, you conducted a share trading business while you were a foreign resident. You subsequently moved to Australia and became a temporary resident before being granted permanent residency. Under the temporary resident rules, your foreign income and foreign capital gains are not taxed in Australia except for any income you earn from employment performed overseas for short periods while you are a temporary resident (sections 768-910 and 768-915 of the ITAA 1997). Accordingly, your foreign business income was not assessable in Australia until you became a permanent resident. Consequently, as your business was not subject to Australian income tax while you were a temporary resident, the items were not trading stock for the purposes of section 70-30 of the ITAA 1997 until you became a permanent resident of Australia. Therefore, you are entitled to apply section 70-30 of the ITAA 1997 to value the trading stock of your business on becoming a permanent resident of Australia.