There are new rules for the tax treatment of certain disposals of trading stock at below market value (including donated trading stock). They apply for disposals occurring on or after 1 April 2024.

That was then

Before the recent law change, a disposal of trading stock at less than market value would generally trigger a tax liability to the transferor – there being a deemed disposal at market value. For the transferee (recipient of the trading stock) there was a deemed purchase at market value on the date of the disposal. It did not matter why or in what circumstances the disposal was made.

Three specific exceptions were provided for:

• a disposal under a relationship agreement;
• a disposal to a non-associated person for use in a farming, agricultural, or fishing business affected by a self-assessed adverse event;
• a disposal under a share lending arrangement.

In the past, temporary relief from the above has been provided when trading stock was donated in response to an adverse or emergency event, such as the Canterbury earthquakes, COVID-19 pandemic, and the North Island weather events of 2023. The COVID-19 pandemic brought to the fore the unfairness of the deemed market value rule. The CA ANZ New Zealand Tax Team responded by initiating engagement with senior Inland Revenue (IR) officials and advocated for a change in the law to remove the overreach, modernise the approach and provide certainty for taxpayers and IR. An issues paper was released for public consultation in July 2023. The amending legislation was introduced and enacted in March 2024.

This is now

Briefly, under the amended rule where trading stock is disposed of for:

• nil consideration, or
• an amount that is less than market value

there will be a deemed disposal at market value for the transferor if the trading stock is:

• disposed of to an associated person
• taken for private use, or
• not disposed of in the course of carrying on a business.

Also, if the above applies the transferee is treated as having purchased the trading stock at market value.

Trading stock disposed of in the course of carrying on a business is not subject to the deemed disposal at market value rule. This outcome will require a nexus between the cost of the trading stock and the income earning activities of the business. For example, a donation of trading stock may be made to promote the business or increase its profile in the community. Whether there is sufficient connection between the disposal and the derivation of business income will be a question of fact.

The market value rule does not apply to a disposal of trading stock to a donee organisation (generally this term refers to charities and certain other entities carrying out charitable purposes in NZ).

This exception ensures the tax rules do not become a barrier to trading stock donations.

The three specific exceptions relating to a disposal under a relationship agreement, self-assessed adverse event, and share lending arrangement have been retained.

Final word

CA ANZ is pleased to see the reform of the rules for the disposal of trading stock in the circumstances described. The amended rule is better targeted, recognises current business practice, and supports donations of trading stock to charities/other communities in need. It also removes the requirement for temporary measures to be enacted in the event of a disaster or emergency event.