Issue
Is the taxpayer, a person who recently commenced business as a sole trader, able to elect under section 70-30 of the Income Tax Assessment Act 1997 (ITAA 1997) to value an item previously owned by the taxpayer which is now held as trading stock at 'cost', where 'cost' is the amount the taxpayer originally paid to acquire the item?
Decision
Yes. The taxpayer can elect under section 70-30 to elect to value an item previously owned by the taxpayer which is now held as trading stock at its cost or its market value. The cost of the item is the amount that the taxpayer paid to acquire it.
Facts
The taxpayer commenced a new business as a sole trader. The taxpayer started holding as 'trading stock' of the business an item that the taxpayer already owned, but which was not held as 'trading stock'. The item was originally acquired by the taxpayer for consideration. The item is not covered by any of the exceptions in subsection 70-30(5) of the ITAA 1997.
Reasons for Decision
When items become trading stock or cease being trading stock, there is deemed to be a notional sale and repurchase under the ITAA 1997.
Where items of property previously not held as trading stock by a taxpayer are then introduced as trading stock, this change is treated as a disposal and re-acquisition at either cost or market value. The taxpayer makes a valuation election under section 70-30 of the ITAA 1997 to choose the cost or market value of the property as its cost for trading stock purposes.
A deduction is available under section 8-1 of the ITAA 1997 at the time of the change as if the property had been acquired as trading stock from a third party.
The amount chosen is also taken to be the proceeds on disposal of the property for the purpose of working out the tax consequences of the notional disposal of the property. For example, the amount is also used to work out balancing adjustments under the depreciation provisions or any capital gain or loss.