Disposal of livestock to an associated person

(Clauses 26, 28(2), 31, 57(8) and (11))

Summary of proposed amendments

New section EC 4B of the Income Tax Act 2007 will provide that the acquirer will be required to use the disposer’s herd scheme elections and base numbers, if any, if the two parties are associated persons. This is to prevent an associated person’s disposal being used to circumvent an election to use the herd scheme.

An exception will be made if there is an inter-generational disposal in certain circumstances. To qualify, children or grandchildren must have had no direct or indirect interest in income from the livestock before the transaction (as a discretionary beneficiary or otherwise) and the disposer will be required to cease farming and have no remaining interest in income from the disposal of the livestock after the transaction.

Proposed new section EC 4B will contain the core associated person’s transaction rule and the inter-generational exception. Section EC 8 will be amended so that when a farmer has acquired herd scheme livestock from an associated person, the “alternative valuation” rule works by increasing the minimum number of livestock the farmer is required to have to be in the herd scheme.

Application date

The amendments will apply from 28 March 2012, the date they were announced.

Key features

Subsection EB 4B(1) proposes that the section applies when livestock that otherwise would have been valued under the herd scheme are transferred to an associated person other than in the ordinary course of business.

Subsection (2) proposes that an exception applies when the transfer is inter-generational and the “person” making the transfer is either the parents or the grandparents of the person receiving the livestock. The major requirements will be that:

• the person making the transfer ceases owning and earning income directly or indirectly from the disposal of specified livestock as a result of the transfer; and
• before the transfer, the person receiving the livestock had no direct or indirect interest in the livestock except through the blood relationship with their parents or grandparents.

The sale or other disposal by a dairy farmer of dairy cows to his or her children who then begin 50/50 sharemilking would typically qualify for the exception (because the transferor would not be receiving income from the disposal of specified livestock). Likewise, earning interest or rent from the new farming enterprise would also typically qualify for the exception.

However, because of the common use of companies (or sometimes, trusts) for farming purposes, this exception is conceptually complex. It applies to a transfer by an entity associated with the parents or grandparents so long as the children or grandchildren have no association with the entity (for example, they aren’t shareholders or beneficiaries) other than by way of the blood relationship they have with their parents or grandparents.

Likewise, the transferee can be an entity associated with the children or grandchildren so long as the parents or grandparents have no association with the entity other than by way of the blood relationship they have with their children or grandchildren.

Subsection (3) proposes that, when section EC 4B applies, the transferee is considered to have made an election to use the herd scheme.

Subsections (4) and (5) contain the mechanics of the section, as follows:

• The classes of livestock transferred to the associated person are classified into the classes they would have been in at the end of the transferor’s income year if the transferor still had them on hand.
• The actual number of livestock of that class that the transferor has on hand at the end of that income year is increased by the reclassed number transferred to the associated person determined immediately above.
• Then the transferor’s actual number of livestock on hand at the end of this year is subtracted from the lesser of the adjusted number on hand determined immediately above and the number actually on hand at the end of the last year.

If positive, any base “alternative valuation” number that the transferee has from the previous year will be increased by this amount. This increase in base number is effected by clause 28(2), which proposes new subsections EC 8(3) and (4) (and subsection EC 8(4) (part of the 18 August 2011 rewrite of section EC 8) is renumbered subsection EC 8(5).

The inter-generational exception is handled by way of new definitions of “descendant” and “descended associate” in sections EC 4B(6) and YA 1.

The associated persons rules will apply to subparts FB (matrimonial property transactions and FC (death and distributions).

Section EC 21 will be consequentially repealed.