Valuation of Livestock

18.9. As explained in paragraph 8.124 trading stock other than livestock may be valued at its cost price, market selling value or replacement cost. In the case of livestock a primary producer must elect to adopt either a cost price or market selling basis of valuation, but the Commissioner may give a taxpayer leave to adopt some other basis for the whole or part of the livestock, and in fact does so where valuable stud animals are acquired.

18.10. Once having adopted either a cost price or market selling basis of valuation, a primary producer is prohibited from changing that basis except with the leave of the Commissioner.

18.11. Where the cost price basis is adopted, a primary producer is required at the end of a year of income to value natural increase born during that year at a cost price

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selected by him, which must not be less than the minimum value prescribed in Regulation 5 of the income tax regulations.

18.12. The minimum values now contained in Regulation 5 have remained unchanged since 1935. Prior to 30 June 1961, maximum values were also prescribed but were excluded by amendment of the regulation in that year. Minimum values are prescribed as follows for the undermentioned classes of livestock only:

Sheep  $0.40 
Cattle  $2.00 
Horses  $2.00 
Pigs  $0.50 

18.13. All livestock in a business of primary production are treated by the Act as trading stock even though some animals are not acquired for the purpose of sale. Although animals not acquired for the purpose of sale (for example, stud stock) could be regarded as more akin to plant than trading stock, there is no provision in the Act for writing off annual amounts of depreciation from their cost. But what is tantamount to depreciation may be written off in other ways: (i) by adopting a market selling value basis of valuation, which will allow for true depreciation; or (ii) by seeking leave of the Commissioner, where the cost price basis of valuation has been adopted, to value stud stock at the end of a year of income at values that will reflect depreciation of original cost values.

18.14. The cost price basis of valuation tends to place values on livestock on hand which are less than cost. Under this method in practice, values are generally determined on the average cost of animals in a herd or flock. In calculating average cost, the purchased stock are brought to account at their cost price and natural increase at values that are somewhat arbitrary but may not be less than the minimum values. In the case of those graziers who prefer to build up or maintain their stock numbers by breeding rather than by purchasing, the adoption of low values for natural increase tends to lead to a fall in the average cost of their stock. Over a period of years during which relatively small numbers are purchased, the average cost of stock tends to approach the minimum value used for natural increase. Under normal conditions these average cost values, which are employed for computing net income, are substantially lower than market values. The cost price system thus contains a bias in favour of bred stock as against purchased stock.

18.15. Another consequence of the cost price system of valuation is that it permits a deferment of tax when animals are bred for sale or immature animals are purchased for ultimate sale. This arises from the fact that the cost of maintaining animals until they reach maturity does not form part of the cost value. To some extent the deferment can be justified on the ground that primary producers are not in a position to pay tax until sales are made. However, where a build-up of numbers from breeding is prolonged over a period, there will be an inevitable accumulation of unrealised profits.

18.16. It has been claimed that the present system of permitting only one basis of valuing livestock to be adopted at the end of a year of income is unfair to primary producers because section 31 allows other taxpayers a choice of bases. However, the two situations are not comparable: the cost price basis to which section 31 applies takes into account all costs of production incurred to the time of valuation, whereas the cost price basis for valuing livestock excludes the cost of maintenance during the livestock's growth and conditioning periods. To allow primary producers to exercise a

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free choice of bases in these circumstances would lead to the possibility of wide fluctuations in net income from year to year. In the United States primary producers are permitted to adopt either a cost price or a market selling basis of valuing livestock at the end of a year of income. But the cost price of livestock must include the cost of maintaining animals until they reach maturity.

18.17. Systems of valuing livestock vary from country to country and no wholly satisfactory system has been evolved. Ideally, livestock should be treated as though they constitute work-in-progress and maintenance costs should be added to the value of animals year by year until they reach maturity; but the introduction of such a system would create complications not inherent in the present system. The United States system, which does provide for this, has proved to be unsatisfactory in practice with the result that an alternative system has been instituted in that country, under which a switching of bases at the end of the year of income is not permitted without leave of the Tax Commissioner. The alternative cost price basis provides for standard costs of animals according to age to be taken into account.

18.18. While the Australian system contains the defects mentioned in paragraphs 18.14–18.15, it is easily understood and is administratively simple. The Committee is not disposed to recommend any significant alteration; but it considers that the bias in favour of breeding stock, and the accumulation of unrealised profits, would be mitigated if minimum cost values of natural increase were periodically reviewed with regard for increases in costs of production, and it therefore recommends that such periodical reviews be undertaken.