Private ruling: Donations - Trading stock
Date of advice: 2 August 2016
Published: September 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Can you claim a deduction for trading stock donated to a Deductible Gift Recipient (DGR)? | A1: Yes.

Relevant facts and circumstances: You are a partnership. You own a retail business. You manufacture your own products for sale. You are frequently asked to donate your products to charity/fundraising organisations.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 30-15; | Income Tax Assessment Act 1997 section 70-10; | Income Tax Assessment Act 1997 subdivision 960-S; | Income Tax Assessment Act 1997 section 995-1.

Reasons for decision: Detailed Reasoning - What is a gift?: Gifts or donations may be deductible under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997). To be accepted as a gift for tax purposes, donations must be made voluntarily, not provide a material benefit for the donor and essentially arise from benefaction and a detached and disinterested generosity on behalf of the donor. Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift provides guidance in relation to when a donation is a deductible gift. Gifts and donations made during an income year to a nominated fund, authority or institution will be deductible if the donation meets the following criteria: • there is a transfer of the beneficial interest in property • the transfer is made voluntarily • the transfer arises by way of benefaction and • no material benefit or advantage is received by the giver by way of return Section 30-15 of the ITAA 1997 and the accompanying table stipulates how and when a gift may be deductible. | Detailed Reasoning - Recipient: As per Item 1 in the table of section 30-15 of the ITAA 1997 (Item 1), to obtain a tax deduction for a gift the recipient of the gift must be a fund, authority or institution covered by an item in any of the tables in Subdivision 30-B of the ITAA 1997. | Detailed Reasoning - Type of gift or contribution: Once it has been established that the recipient is a valid gift recipient, the nature of the gift or donation is to be considered. Under section 30-15 of the ITAA 1997 the types of gift or contribution that can be deductible, are a gift of: (a) money (b) property that you purchased during the 12 months before making the gift (c) an item of your trading stock, or (d) property valued by the Commissioner at more than $5,000. | Detailed Reasoning - How much you can deduct: As per Item 1 you can claim a deduction for so much of the gift: (a) if the gift is money - the amount you are giving, or (b) if the gift is property (except trading stock covered by paragraph (c) or property covered by paragraph (d) - the lesser of the market value of the property on the day you made the gift and the amount you paid for the property, or (c) if the gift is an item of your trading stock: that you disposed of outside the ordinary course of your business; and for which no election has been made, or is made, in relation to the item under Subdivision 385-E (primary producers election on the forced disposal or death of livestock); the market value of the item on the day you made the gift, or (d) if the gift is property valued by the Commissioner at more than $5,000 and you did not purchase the property during the 12 months before making the gift - the value of the property as determined by the Commissioner | Detailed Reasoning - Special conditions: Once it has been determined that: • the funds, authority or institution is covered by an item in the tables in Subdivision 30-B of the ITAA 1997; and • the item is a gift eligible as per Item 1 of section 30-15 of the ITAA 1997; and • the amount deductible to the rulee; the Special Conditions in Item 1 must be considered. The Special Conditions in Item 1 states as follows: (a) the fund, authority or institution must be in Australia; and (aa) the fund, authority or institution must either meet the requirements of section 30-17 or be mentioned by name in the relevant table item in Subdivision 30-B; and (b) the value of the gift must be $2 or more; and (c) any conditions set out in the relevant table item in Subdivision 30-B must be satisfied; and (d) if the property is to be valued by the Commissioner - the requirements of section 30-212 are satisfied. | Detailed Reasoning - Trading stock: Subsection 70-10(a) of the ITAA 1997 states that trading stock is anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of business. | Detailed Reasoning - Making a gift of trading stock: To be a deductible gift of trading stock, the following two conditions must be met; • the gift is a disposal of the trading stock outside the ordinary course of the donor's business, and • if the gift involves the forced disposal or death of livestock - no income tax election has been made to spread or defer the profit. It is not necessary for the trading stock to have been purchased during the 12 months before the gift was made. Valuation The value of the gift is the market value of the trading stock on the day the gift was made. The donor may also need to include the market value in assessable income under the general rules for income tax. For trading stock disposed of as a gift outside the ordinary course of business, the stock's market value is normally included in the donor's assessable income. Note: The gift deduction is not allowable to the extent that it adds to, or creates a tax loss. Market value For donors who are registered for GST or required to be registered, the amount that would otherwise be the market value is reduced by an amount equal to the GST credit (if any) to which the donor would have been entitled if: • the donor had acquired the property at the time the gift was made, and • the acquisition had been solely for a creditable purpose. Donors who are not registered for GST, and are not required to be registered, do not need to adjust the market value. | Detailed Reasoning - Application to your circumstances: You are in the business of selling goods; therefore they are considered trading stock as they are produced for sale in the normal course of your business. Where a gift of trading stock is made to a DGR and you don't receive a material benefit from the gift, a deduction is allowable. A deduction will therefore be allowed for the market value of the goods on the day that you make the donation. However, you will need to include the market value of the goods in your assessable income. Refer to the ATO publication GiftPack (NAT 3132) available on our website at ato.gov.au for examples.