Private ruling: Valuation of Trading Stock - Natural Increase
Published: February 2015
Ruling period: 30 June 2014 | 30 June 2015 | 30 June 2016 | 30 June 2017 | 30 June 2018
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can the company value its natural increase live stock at the prescribed cost in regulation 70-55.01 of the Income Tax Assessment Regulations 1997 , pursuant to section 70-55 of the Income Tax Assessment Act 1997(ITAA 1997) ? | A1: Yes

Relevant facts and circumstances: The Company is incorporated in Australia. The company is a resident for taxation purposes. The company produces food products from livestock. The company distributes to food service, retail and wholesale clients. The company operates several livestock farms, factories and processing operations. The company has a comprehensive stock management process and controls in place, with a stock take undertaken weekly, and audited annually by an external accounting firm. Strict controls are in place to ensure accuracy over the number of livestock held at the end of an income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 70-10 | Income Tax Assessment Act 1997 subsection 70-45(1) | Income Tax Assessment Act 1997 section 70-55 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Regulations 1997 Regulation 70-55.01

Reasons for decision: Summary: Division 70 of the ITAA 1997 provides special rules to account for trading stock for income tax purposes. Under subsection 70-45(1) of the ITAA 1997 the taxpayer must elect to value each item of trading stock on hand at the end of the income year at either: • its cost; or • its market selling value; or • its replacement value. The 'cost' of an item of trading stock, in the case of an animal acquired by natural increase, has the meaning provided by section 70-55 of the ITAA 1997 (section 995-1 of the ITAA 1997). Trading stock is defined in section 70-10 of the ITAA 1997 and includes: (a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and (b) livestock. 'Livestock' 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). Section 995-1 of the ITAA 1997 defines 'primary production business'. A primary production business includes 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 livestock, 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 livestock, 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 that you hold as live stock acquired by natural increase for the purposes of section 70-55 of the ITAA 1997. The special valuation rules for working out the cost of natural increase of livestock in subsection 70-55(1) of the ITAA 1997 state: The cost of an animal you hold as livestock that you acquired by natural increase is whichever of these you elect: (a) the actual cost of the animal; (b) the cost prescribed by the regulations for each animal in the applicable class of livestock. Regulation 70-55.01 of the Income Tax Assessment Regulations 1997 (ITAR 97) provides the cost prescribed for each animal in a class of livestock. | Detailed Reasoning - Application to your Circumstances: The company is carrying on a primary production business in accordance with the definitions set out in section 995-1 of the ITAA 1997. The company's live stock falls within the definition of trading stock because they are livestock of the company's business. The company may elect to value its live stock acquired by natural increase at the cost prescribed under Regulation 70-55.01 of the ITAR 97.