Donating Trading Stock
What was a temporary tax concession relating to donated trading stock has now become a permanent one thanks to the enactment of the Taxation (Annual Rates for 2023–24,Multinational Tax, and Remedial Matters) Act 2024 on 1 April 2024. Prior to March 2020, in most cases, if a business donated trading stock it resulted in deemed income equivalent to its market value. This resulted in a business being taxed on a deemed profit margin, even though no cash was received.
The rule was initially introduced to counter tax avoidance, to address situations where sole traders were using trading stock personally. This provision was temporarily amended in March 2020 to allow trading stock to be donated to donee organisations (such as charities) and public authorities without triggering deemed income.
A deduction for the cost of the trading stock was also allowed (i.e. a net tax deduction for the donated trading stock to these specific parties arose). This was to encourage donations of products like hand sanitiser to hospitals, or consumables to food banks during the Covid pandemic.
Where trading stock was donated to non-associates (that were not either a donee organisation or a public authority), the concession deemed income to arise, but it was equal to the cost of the trading stock (i.e. net nil impact on taxable income). The concession was extended at the start of 2023 as a result of the adverse weather events that occurred in January – March 2023, and was due to expire on 31 March 2024.
The recently enacted legislation has permanently amended the deemed market value provision. From 1 April 2024, deemed income will not arise if the trading stock is donated to a donee organisation. However, if the trading stock is not donated to a donee organisation it becomes more complex. In this context income based on the market value of the trading stock will only be triggered if: it is disposed of to an associated person, or a person takes it for their own consumption, or it has not been disposed of in the course of carrying on a business for the purpose of deriving assessable or excluded income.
The relevance of it ‘not’ being in the ordinary course of business is important and arguably counter intuitive. To illustrate: If as a result of a weather event a large supermarket chain makes a one-off donation of groceries to specific families in need, then deemed income arises. If instead a supermarket chain provides groceries to families as part of a marketing or promotional campaign that is part of its ordinary marketing initiatives, income is not deemed to arise.
In the context of donations of trading stock to donee organisations the amendment is positive. However, based on the weather event example above, it falls short.