Issue
Can the election under subsection 70-100 (4) of the Income Tax Assessment Act 1997 ('ITAA 1997') be exercised in respect of trading stock transferred to a company upon incorporation of a business, so that the trading stock is brought to account at its closing value rather than its market value?
Decision
No. The election under subsection 70-100 (4) of the ITAA 1997 cannot be exercised.
Facts
The taxpayer conducts a primary production business as a sole trader and is considering incorporating the business.
Reasons for Decision
When trading stock is transferred from one entity to another, an election is available under sub-section 70-100 (4) of the ITAA 1997 that allows trading stock to be valued at tax or book value, rather than market value, if certain conditions are met as outlined in subsection 70-100 (6) of the ITAA 1997.
One of these conditions is that the entity which owned the livestock before the transfer, must have at least a 25% share in the ownership of the livestock after the transfer.
In this case, the taxpayer is an individual who is transferring all their ownership of the livestock to another entity, a private company. A company is a separate legal entity in law and has ownership of any property acquired by it, including trading stock. A shareholder in a company does not hold a legal or equitable interest in any property (including trading stock) of the company . The company shareholders are therefore not the legal owner of any trading stock held by a company.
Therefore, the requirements of subsection 70-100 (6) of the ITAA 1997 are not met and the tax or book value of the livestock cannot be used to value the livestock upon transfer to the company.