Tax Accounting for Livestock: How they got it wrong

Abstract

Abstract

A consequence of droughts, floods, fires, tempests or family disasters is the forced sale or loss of valuable livestock. To add to their troubles receipts arising from those forced disposals is currently considered to be income according to ordinary concepts by the Australia Taxation Office (ATO) and taxed accordingly. These papers argue that the provisions of the Income Tax Assessment Act 1997 (ITAA 1997) are being misinterpreted by tax administrators and tax professionals.

These papers consider the income and capital gains tax implications on the sale of animals in conjunction with the sale of pastoral and farming properties in Australia, as well as other unintentional disposal of animals caused through natural disasters and disease control.

The research supporting these papers finds that the ATO opinion which considers ALL animals held in a primary production business to be trading stock is based entirely on its interpretation of the majority decision of Federal Commissioner of Taxation v Wade (Wade Case), despite the word ALL not being contained in s 995 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997). The research examined the Wade Case in detail, together with the original income tax return furnished by the taxpayer, Michael Wade in 1948 and subsequent appeals which led to the final appeal to the full bench of the Federal Court in 1951. They argue that the decision of the Wade Case may have been misinterpreted, and that the ATO view is not as valid as is generally accepted.

The papers find that, prior to 1936, animals used as breeding stock were of a capital nature for taxation purposes under the provision of s 17 of the Income Tax Assessment Act 1922. The lack of awareness of the repeal of s 17 led to existence of the Wade Case for had the accountant, the tax assessor, the legal practitioners and the court been aware of the legislative change in 1936, some 12 years before Wade’s income tax return was lodged, then the issue would never have arisen. The papers suggest the recommendation to repeal of s 17 was misinterpreted and the repeal was a mistake

The papers argue that the practice of the ATO of issuing opinions and taxation rulings for the guidance of taxation practitioners compiling and submitting taxation returns does not always result in greater clarity or certainty in the application of taxation laws. They argue that tax practitioners should not always consider that the advice provided by the ATO is without challenge.

The authors suggest s 17 be re-enacted to reinstate stud stock and animals used for the purposes of manufacture as capital assets to restore equity to Australia’s primary producers.