Issue
Where a value is attributed to all of an STS taxpayer's stock on hand at the end of an income year under subsection 328-295(2) of the Income Tax Assessment Act 1997 (ITAA 1997), can the STS taxpayer use that value as the notional end of year value of its stock for the purposes of subsection 70-100(4) of the ITAA 1997 and any subsequent disposal of that stock?
Decision
No. An STS taxpayer that makes an election under subsection 70-100(4) of the ITAA 1997 needs to work out the value under Subdivision 70-C of the ITAA 1997 of each item of stock disposed of. They cannot rely on a value attributed to all of their stock on hand at the end of the income year under subsection 328-295(2) of the ITAA 1997.
Facts
An STS taxpayer makes an election under subsection 70-100(4) of the ITAA 1997. Under that subsection, the STS taxpayer needs to work out what the value of each item of stock disposed of would be if the income year ended on the day of disposal.
The value of the STS taxpayer's stock on hand at the start of the relevant income year is $4,000. The STS taxpayer's reasonable estimate of the value of their stock on hand on the day of the disposal is $7,000.
Reasons for decision
Subsection 328-295(2) of the ITAA 1997 means that where the difference between the value of an STS taxpayer's stock on hand at the start of an income year, and the reasonably estimated value of their stock on hand at the end of that income year is not more than $5,000, the STS taxpayer's value of their stock on hand at the end of that year is the value of their stock on hand at the start of that year.
Hence, if the STS taxpayer's figure of $7,000 was a reasonable estimate of the value of all their trading stock on hand at the actual end of the income year in question, then they would not need to account for the change in the value of that stock: subsection 328-285(1) of the ITAA 1997.
However, in this case the STS taxpayer has disposed of their trading stock outside of the ordinary course of business under subsection 70-100(1) of the ITAA 1997. They have also made an election under subsection 70-100(4) of the ITAA 1997 to treat their stock as disposed of for what would have been its value had the income year ended on the day of disposal.
Subsection 70-100(4) of the ITAA 1997 requires an entity making an election under that subsection to work out the value of each item of trading stock disposed of on the relevant day.
The term 'value' is used in subsection 70-100(4) of the ITAA 1997 according to its defined meaning. Subsection 995-1(1) of the ITAA 1997 provides that the value of an item of trading stock has the meaning given by Subdivision 70-C of the ITAA 1997.
Subdivision 70-C of the ITAA 1997 makes clear that for the purposes of Division 70 of the ITAA 1997 the value of a taxpayer's trading stock is worked out on an item by item basis.
The value of an item of trading stock on its date of disposal cannot be worked out using the amount provided for under subsection 328-295(2) of the ITAA 1997. This is because the end of year figure provided for under subsection 328-295(2) of the ITAA 1997 is simply the same figure as the STS taxpayer's opening stock value for the year. This amount represents the total value attributed to all of the STS taxpayer's stock on hand at the end of the income year. It does not represent the value of a distinct item of stock. Nor does it represent the total of the values of each item of stock on hand at that time.
To comply with subsection 70-100(4) of the ITAA 1997 an STS taxpayer will therefore need to arrive at an end of year value for each item of stock on hand on the day of disposal following Subdivision 70-C of the ITAA 1997. In addition, paragraph 70-100(6)(c) of the ITAA 1997 provides that the value arrived at for each item for the purposes of subsection 70-100(4) of the ITAA 1997 has to be less than the market value of the item.