Trading stock: natural increase - relevance of survival rates

When will Atlantic salmon bred in a land-based nursery as part of an aquaculture business become an 'animal that you hold as live stock' for the purposes of section 70-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Atlantic salmon bred in a land-based nursery as part of an aquaculture business become an 'animal you hold as live stock' for the purposes of section 70-55 of the ITAA 1997 when they reach the 'fry' stage of development.

The taxpayer conducts an aquaculture business producing Atlantic salmon for sale. The operations of the business are carried out at a land-based nursery and at sea farms.

Each brood female produces about 3000 eggs which are fertilised and incubated in the nursery. The hatched offspring go through a number of distinct growth stages: • immediately after hatching the juveniles (alevin) have a yolk sac attached and look like tadpoles • alevin develop into free-feeding individuals with the appearance of small fish (fry) when about 2 centimetres long and weighing about 3 grams • fry develop distinctive markings at about 5 centimetres (parr) • at about 9 to 12 months' old, parr undergo an internal transformation which enables them to live in both saltwater and fresh water (smolt) • at about 15 months of age when the smolt are of sufficient size, they are transferred to sea farms for growing out to adult fish. Adults are harvested for sale at 2 to 3 years of age.

The ordinary survival rates in the taxpayer's aquaculture operations during the hatching and development stages up to transfer are: Incubation survival (to become 'eyed eggs') 50% Trough survival (successfully hatched into alevin) 65% First feeding survival (successfully feeding, at fry stage) 90% Grow-out survival (successfully grown to transfer size) 90% Successfully graded for transfer (size, colour, shape, age) 90%

Incubation survival (to become 'eyed eggs') | 50%

Trough survival (successfully hatched into alevin) | 65%

First feeding survival (successfully feeding, at fry stage) | 90%

Grow-out survival (successfully grown to transfer size) | 90%

Successfully graded for transfer (size, colour, shape, age) | 90%

Division 70 of the ITAA 1997 provides special rules to account for trading stock for income tax purposes. Its key features are described in section 70-5 of the ITAA 1997.

The purpose of these rules is to produce an overall result that properly reflects trading stock activities during the income year. As explained by Professor Ross Parsons in Income Taxation in Australia (1985) at page 792 (paragraph [14.1]): Allowing a deduction of an outlay that is the cost of trading stock would bring about an unacceptable distortion in the operation of the Assessment Act, were it not for the provisions of s. 28 [now section 70-35 of the ITAA 1997]. That section in its most common operation will negative the allowance of the deduction by bringing in a like amount as income, if the item of stock has not been disposed of by the end of the year of income. In effect, the deduction of cost is deferred till the year of income in which the stock is realised and there is a matching receipt of assessable income.

Trading stock is defined in section 70-10 of the ITAA 1997 to include live stock, which may include aquatic species, for example, freshwater crayfish ( Taxation Determination TD 2017/7 ) and abalone ( ATO Interpretative Decision 2003/44 ).

Subsection 70-55(1) of the ITAA 1997 provides for the cost of an 'animal you hold as live stock' that you acquired by natural increase.

'Live stock' 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).

Carrying on a primary production business is defined in section 995-1 of the ITAA 1997 to include 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 live stock, 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 live stock, 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 you hold as live stock' acquired by natural increase for the purposes of section 70-55 of the ITAA 1997.

In this case the taxpayer breeds Atlantic salmon in a land-based nursery as part of an aquaculture business, which is a primary production business. The animals the taxpayer maintains are live stock for the purposes of Division 70 of the ITAA 1997.

The fry stage is when juvenile Atlantic salmon become free-feeding and take on the appearance of small fish. At this point they are transferred to tanks and the period of rearing and maintenance begins. From the information supplied by the taxpayer, from the fry stage the mortality rates of the juvenile fish are low and the population has stabilised to reflect the number of fish that will be held for sale.

For these reasons, Atlantic salmon bred in a land-based nursery as part of an aquaculture business become an 'animal you hold as live stock' for the purposes of section 70-55 of the ITAA 1997 when they reach the 'fry' stage of development.

Date of Amendment Part Comment 20 February 2018 Decision Reasons for Decision Amended quoted wording to match those in section 70-55 of the ITAA 1997. Reasons for Decision Related Public Rulings (including Determinations) Removed reference to Taxation Determination TD 93/70 and Income Tax Ruling 2667, both of which are withdrawn. Inserted Taxation Determination TD 2017/7 (which replaced Income Tax Ruling 2667) Legislative References Added reference to section 995-1 of the ITAA 1997. Other References Updated reference to The Macquarie Dictionary

Date of Amendment | Part | Comment

20 February 2018 | Decision Reasons for Decision | Amended quoted wording to match those in section 70-55 of the ITAA 1997.

Reasons for Decision Related Public Rulings (including Determinations) | Removed reference to Taxation Determination TD 93/70 and Income Tax Ruling 2667, both of which are withdrawn. Inserted Taxation Determination TD 2017/7 (which replaced Income Tax Ruling 2667)

Legislative References | Added reference to section 995-1 of the ITAA 1997.

Other References | Updated reference to The Macquarie Dictionary