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 the receiving business being taxed on a deemed profit margin, even though no cash was received.
The ‘donated trading stock rule’ was initially introduced by IR to counter tax avoidance and address situations where sole traders were using trading stock personally.
This rule 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. As at 01 April 2024 this temporary tax concession has become a permanent rule due to enactment of the Taxation (Multinational Tax, and Remedial Matters) Act 2024.
The recently enacted legislation has permanently amended the deemed market value provisions for donee and donor companies. From 1 April 2024, deemed income will not arise if the trading stock is donated to a donee organisation. However, if ‘trading stock’ is not donated to a donee organisation, the market value of the trading stock will 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.
In the context of donations of trading stock to donee organisations the amendment is positive. However, it does have some complexities which should be discussed with your financial and accounting advisor before any major donations are implemented.