Trading stock: valuation at cost - GST and second-hand goods acquired from an unregistered entity

Where a taxpayer, a second hand goods dealer, purchases second-hand goods as trading stock from an unregistered entity, should they disregard an amount equal to their GST input tax credit entitlement (if any), when valuing their closing trading stock at cost at the end of an income year under subsection 70-45(1A) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, where a taxpayer, a second hand goods dealer, purchases second-hand goods as trading stock from an unregistered entity, they should disregard an amount of 1/11 of the consideration paid, representing their entitlement to a GST input tax credit, when valuing their closing trading stock at cost at the end of an income year under subsection 70-45(1A) of the ITAA 1997.

The taxpayer is a second-hand goods dealer and is registered for GST and accounts on a non-cash basis.

The taxpayer makes an acquisition of a second-hand good for resale. The good is not divided for re-supply.

The acquisition meets the requirements of section 66-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The entity is entitled to attribute an input tax credit for the acquisition in accordance with section 66-15 of the GST Act.

The second-hand good is an item of trading stock and remains unsold at the end of the year. The taxpayer elects to value the item of trading stock at cost.

Where a taxpayer carries on business, all trading stock on hand at the start of the income year and all trading stock on hand at the end of that year are taken into account in working out the taxpayer's taxable income. (Section 70-35 of the ITAA 1997.)

In determining the closing value of trading stock, an amount equal to the GST input tax credit to which you would be entitled if you acquired the stock at the end of the income year is disregarded. (Subsection 70-45(1A) of the ITAA 1997.)

Subsection 70-45(1A) of the ITAA 1997 ensures that the cost, market selling value or replacement value of an item of trading stock at the end of an income year does not include any GST input tax credit to which the taxpayer would be entitled if the taxpayer had acquired the item at that time solely for a creditable purpose. Something is acquired solely for a creditable purpose if it is acquired solely in carrying on the taxpayer's business, but not for making supplies that are input taxed within the meaning of the GST Act. This reduction in value does not apply to items of trading stock that cannot be the subject of a taxable supply, such as shares.

Division 66 of the GST Act allows an entity, in some circumstances, to claim an input tax credit for acquisitions of second-hand goods, even though GST was not payable on the supply of the goods. Section 66-5 of the GST Act operates to effectively override the general rule in paragraph 11-5(b) of the GST Act, and provides that an entity makes a creditable acquisition even if the supply of the good to the entity is not a taxable supply. Thus, the acquisition of second-hand goods by a second-hand dealer registered for GST gives rise to an input tax credit even though the acquisition was not a taxable supply because the supplier was not registered for GST.

Section 66-10 of the GST Act contains the rules for working out the amount of the input tax credit. If the consideration is more than $300, the credit allowed is the lesser of 1/11 of the consideration provided, and the GST payable on the subsequent supply of the goods (subsection 66-10(1) of the GST Act).

Section 66-15 of the GST Act provides that an entity can attribute an input tax credit to which it is entitled under Division 66 of the GST Act to: the tax period in which any consideration is received for a subsequent taxable supply of the goods; or if, before any of the consideration is received, an invoice is issued relating to the supply - the tax period in which the invoice is issued.

For acquisitions over $300 that are not divided for re-supply, and for which the entity is entitled to an input tax credit, the amount of the input tax credit is not determined until the goods are sold. Subsection 70-45(1A) of the ITAA 1997 refers to 'an amount equal to the amount of the input tax credit... to which you would be entitled' that must be excluded from the value of stock on hand as 'at the end of an income year' . This is not however a reference to the amount that may eventually be claimed as an input tax credit as calculated under section 66-10 of the GST Act and attributed in accordance with section 66-15 of the GST Act.

The second-hand good is an item of trading stock and remains unsold at the end of the year. The taxpayer at the end of year elects to value the item at cost. Therefore, 1/11 of the cost of the item represents an entitlement to an input tax credit, and is excluded from the trading stock calculation under subsection 70-45(1A) of the ITAA 1997.