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Should a giveaway come with a tax bill?

Tax Alert - August 2023

For many years businesses have been complaining about an example of overreach in our tax laws – section GC 1 of the Income Tax Act 2007. Most people may have never heard of it, but what this section says is that any ‘trading stock’ is always deemed to be disposed of for market value. Trading stock has an expanded definition for the purposes of this rule and as well as traditional concepts of stock, it includes any land that may be subject to tax. Section GC 1 essentially exists to ensure that a business owner can’t take stock for their own purposes or give stock to associates for free or for heavy discounts.

Section GC 1 is controversial because along with transactions with owners and associates, it raises the prospect that a business that is donating stock to a school raffle, giving food to a foodbank, providing emergency supplies in disaster zones, providing every 10th coffee free etc is also deemed to receive income under a fictitious sale transaction. If a business has the time and inclination to enter into some form of sponsorship agreement, then arguably the section would not apply as there is consideration being received for the trading stock.

In recognition of the overreach under section GC 1, a number of temporary overrides have been in place, both during periods with natural disasters and during COVID-19. The latest temporary exemption is due to expire on 31 March 2024.

With the looming expiry in mind, Inland Revenue has released an Officials’ Issues Paper (‘the Paper’) which explores options of how to address the issues of overreach on a more permanent basis.

Businesses who routinely give away stock, and the charities and others who receive it should take note of the proposals and look to provide feedback before the 6 September closing date for submissions.

The paper primarily focuses on two types of transactions:

  • Trading stock disposals that are not gifts
  • Gifts of trading stock

Transactions between associates and those that are clearly intended to defeat the trading stock rules will continue to be subject to section GC 1. The Paper also proposes that any future concessions will not be extended to land transactions.

Disposals that are not gifts

This chapter of the issues paper considers transactions where stock is disposed of for less than market value in the ordinary course of business. This could include marketing or sponsorship arrangements and sales below market value to clear stock or improve cashflow. The paper notes that the need for businesses to assign market values is often subjective and inaccurate.

There are three options put forward:

  1. Continue the status quo and require deemed income to be returned
  2. Make the temporary relief permanent
  3. Introduce a deemed deduction as well as a deemed expense

Under this third option, taxpayers would need to calculate and report market values of all stock falling under section GC 1, with equal and opposite amounts being disclosed as separate line items in tax returns. Option 2 seems a clear winner.

Gifts of trading stock

This chapter focuses on gifts to charities or donee organisations where there may not be a ‘business purpose’ (a true gift does not have a connection with income). The chapter contrasts the treatment of stock to the treatment of gifts in cash, where tax benefits (in the form of tax deductions) are limited to a company’s net income.

The paper puts forward 5 options:

1. The status quo continues, with temporary relief in emergency times

2. Make the temporary relief permanent

3. Make the temporary relief permanent but limit it to donee organisations and exclude public authorities, and consider a cap based on net income

4. Deem all donors to derive income at cost or opening value of the donated trading stock (this is not a concessionary option but reduces compliance costs)

5. Remove the deemed income rule for gifts of food made to approved donee organisations and non-associated parties

Deloitte comment

Given the number of years that businesses have been raising these issues, it is somewhat disappointing that we are not yet closer to a chosen solution to the overreach of section GC 1. However, the Paper is a step in the right direction.

Businesses are increasingly focused on how they can contribute to society and reduce environmental impacts (for example by being able to donate obsolete but still functional stock). Being able to provide goods to those who can use them for either no or low cost can be a win-win for everyone, however having an associated tax bill can be a bitter pill to swallow, so reform in this area is warranted. Continuing with a tax rule that encourages products to be sent to landfills rather than being given to those who can use them should not be an option we are prepared to accept.

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