If a donor has a business and they make a gift of trading stock that they dispose of outside of the ordinary course of their business, it can be tax deductible in some circumstances.
Trading stock includes anything produced, manufactured or acquired that is held for the purpose of manufacture, sale or exchange in the ordinary course of business.
For these gifts to be tax deductible, your donor must meet both of the following conditions:
- the gift is a disposal of the trading stock outside the ordinary course of their business
- they have not made an income tax election if the gift involves the forced disposal or death of livestock.
Example – Donating stock
Ghia operates a furniture retail business. She knows a DGR that could use a particular cupboard she has in stock.
If Ghia donates the cupboard to the DGR, she is disposing of her trading stock outside of the ordinary course of her business. Therefore, the gift type 'Trading stock' may apply to the gift.
End of example
Your donors need to consider the following points:
- To be tax deductible, their gift must be made to a DGR.
- The gift deduction they can claim is the market value of the trading stock on the day they donate it (if the deduction does not add to or create a tax loss). To find out how the donor gets a valuation, see How supporters get valuations.
- If they are registered for GST (or required to be registered), the market value is reduced by the amount of GST credit they would have been entitled to if
- they had acquired the property at its market value at the time they donated it
- the purchase had been only for a purpose that GST credits would apply to.
- If they are not registered for GST and are not required to be registered, they do not need to adjust the market value.
- They can claim a tax deduction for the gift in the income year they donated the property.
- They may also need to include the market value of the trading stock (their gift deduction) in assessable income under the general rules for income tax. If the gift is valued at more than $5,000, they can use the value determined by us if the valuation is made within 90 days of donating the property.
- There are other income tax consequences of making a gift to a DGR that they may need to consider, including
- record keeping
- tax losses
- deductions for jointly-owned property
- deductions for valuation expenses
- decline in value for gifts of depreciating assets
- CGT when you donate property (including shares).
Example 1 – Donating stock with a GST credit
Madeleine runs a fabric shop and is registered for GST. She donates some of the shop's stock to a DGR on 7 November 2013. 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).
Example 2 – Disposing of trading stock outside the ordinary course of business
Joseph operates a retail business and values his trading stock at cost. In the 2012–13 income year, he purchased $2,000 of trading stock for resale in his business. The stock was still on hand at the end of that income year. During the 2013–14 income year, he donated the same trading stock to a DGR. At the time of donating the stock, it had a market value of $3,000.
In the 2012–13 income year, Joseph claims as a deduction the $2,000 cost of trading stock purchased in that year. He also records $2,000 as part of his trading stock on hand at the end of the year. Therefore, there is a neutral effect on his taxable income for the 2012–13 year.
In the 2013–14 income year, the stock forms part of his opening trading stock. On the day it is donated, the stock ceases to be trading stock and does not form part of his closing trading stock for that financial year. Joseph receives a deduction for the difference between his opening and closing stock values (that is, $2,000).
As the gift is a disposal of trading stock outside the ordinary course of his business, Joseph also includes as assessable income the market value of the trading stock (that is, $3,000). He will also claim a gift deduction for this amount. The overall effect in the 2013–14 income year is a reduction of $2,000 in his taxable income.
End of example
More than one gift type
If a donor makes a gift of trading stock disposed of outside the ordinary course of their business, they may be able to claim a tax deduction.