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If 'cost' is used to value an aquaculture product under paragraph 70-45(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), is the valuation limited to the purchase price of the immature stock?

No, when valuing aquaculture products under paragraph 70-45(1)(a) of the ITAA 1997, the cost is not limited to the purchase price of the immature stock.

Aquaculture stock are being bred in a land based marine operation. A substantial labour force is employed full time in the complex operation of producing mature stock. Breeding stock are taken from their natural environment and are placed in a temperature and light controlled holding area. The breeding stock are then separated by gender and induced to release their eggs or sperm. The eggs and sperm are analysed and then combined for fertilisation. The fertilised eggs are then placed in trays where they hatch.

The immature stock are then placed into rearing vessels. At the end of this stage the stock are placed into a nursery where they remain for several months. They are then held in tanks until ready for sale. The final stage is the most labour intensive stage with the staff undertaking feeding, cleaning, monitoring and water sampling.

The term 'cost price' is not defined in the ITAA 1997. Consequently, the definition is to be determined from the ordinary meaning of the term. Generally, it is held to include the cost to the taxpayer of bringing trading stock into a state ready for sale or a stage of manufacture (Philip Morris Ltd v. FC of T (1979) 38 FLR 383; (1979) 10 ATR 44; 79 ATC 4352 (Philip Morris Case)).

Taxation Ruling IT 2350 recognises that the courts have established the following general propositions about how a taxpayer values manufactured trading stock at 'cost price' under subsection 31(1) of the ITAA 1936: • 'cost price' is read simply to mean 'actual cost' ( Fullagar J in Australasian Jam Co Pty Ltd v. Federal Commissioner of Taxation (1953) 88 CLR 23; (1953) 10 ATD 217; (1953) 5 AITR 566). • 'cost' is directed to the expenditure needed to bring the article to the state in which it was when it became trading stock (Jenkinson J in Philip Morris Case); and • the absorption cost method is the correct method to value the 'cost' of manufactured trading stock (Jenkinson J in Philip Morris Case ).

The process of farming aquaculture products can be properly compared with a manufacturing process. Both processes use a combination of natural and human-controlled processes to produce a product. In regard to manufacturing, the process of production is largely performed on the raw materials by labour and machinery. In the production of aquaculture products, the process of production is largely performed on the raw material, that is, the juvenile stock. However, with manufacturing and aquaculture farming there is a process of conversion taking place with inputs of raw materials, labour and production overheads.

As a result, absorption costing will apply as equally to the valuation of aquaculture farming at cost as it does to the valuation of manufactured articles at cost.