Many businesses and DGRs overlook the ability to claim a tax deduction for a gift of trading stock.
Trading stock is defined as anything a business produces, manufactures or acquires, to manufacture, sell or exchange and includes livestock.
Trading stock is subject to special tax rules that enable a business to calculate annual profit based on trading stock on hand at the beginning and end of a year, as well as acquisitions and sales during the year. Where trading stock is disposed of outside the ordinary course of business, that is, not sold, there needs to be a balancing adjustment to the taxpayer’s assessable income to reflect the allowance made for acquiring the trading stock — this is normally at market value.
To be tax deductible the transfer of trading stock to the DGR:
- must be a gift, that is, disposed of outside the ordinary course of business; and
- the taxpayer must not have claimed an income tax deduction for the forced disposal or death of livestock.
The deductible amount is the market value of the trading stock on the day it is donated.
If the taxpayer is registered for GST the market value is reduced by the amount of GST credit the taxpayer would have been entitled to if the property had been acquired at its market value at the time it was donated.
Flur runs a fabric shop and is registered for GST. She donates some of the shop’s stock to a DGR. The market value on that day (including GST) was $2,200.
If she had bought the stock for $2,200 on that day, she would have been entitled to a GST credit of 1/11th if the stock was only to be used to sell. Therefore, she would have been able to claim back $200 of GST on the purchase.
As a result, the market value of the stock for gift deduction purposes would be $2,000 (that is, $2,200 minus $200)