Non Commercial Losses: Other Assets test - valuation of trading stock

Can a taxpayer amend a tax return, after an assessment is made, to alter the figure for closing stock by adopting a different basis of valuation to that on which the return was originally prepared for the purposes of altering the assessable income for the assessable income test in Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The taxpayer makes their choice of valuation method at the time the income tax return is lodged. An alteration to that choice for the purposes of Division 35 of the ITAA 1997 is not permissible once the assessment of that return has issued.

An individual taxpayer is carrying on a business activity. The taxpayer lodged an income tax return which specified a particular basis of valuation for determining the closing stock value. An assessment issued on the basis of the lodged income tax return.

The taxpayer's business expenses exceeded the assessable income for the income year for which the return was lodged.

The taxpayer did not pass the assessable income test in section 35-30 of the ITAA 1997 on the basis of the income tax return lodged.

The taxpayer did not pass any of the other tests outlined in Division 35 of the ITAA 1997, nor was the Commissioner's discretion exercised, and the taxpayer did not qualify for any of the exceptions to the operation of subsection 35-10(2) of the ITAA 1997. Consequently the business losses were deferred.

The taxpayer wants to amend the income tax return to alter the method of valuation, and thereby pass the assessable income test.

The Commissioner has taken the position in Taxation Determination 94/10 that subsection 31(1) of the Income Tax Assessment Act 1936 (ITAA 1936) (after 1997-1998 income year Division 70 of the ITAA 1997 applies) allows a taxpayer the option of valuing each article of trading stock on hand at the end of the year of income at cost price, market selling value or the price at which it can be replaced.

The Commissioner expresses the view in TD 94/10 that the valuation option is exercised at the time the taxpayer ascertains whether or not there is taxable income. The method chosen will be evident in the taxpayer's calculation of taxable income or loss as specified in the tax return. By making the choice the taxpayer is electing what law is to be applied in ascertaining the value of trading stock, which must be taken into account in determining taxable income. The taxpayer may not, once they exercise the option, vary the election for that year of income. See Case G55 (1956) 7 TBRD 314; (1956) 6 CTBR (NS) Case 46 ; Case D95 (1953) 4 TBRD 483; (1953) 4 CTBR (NS) Case 2

The view in TD 94/10 is consistent in assessing whether an amendment should be allowed for the purposes of passing a test in Division 35 of the ITAA 1997.

Once the taxpayer chooses a method of valuing trading stock that is appropriate to the business in the tax return and the Commissioner makes an assessment of taxable income and tax payable thereon, or is deemed to have made an assessment under section 166A of the ITAA 1936, the method of valuation cannot be varied. It is at this point that the Commissioner assesses whether or not Division 35 of the ITAA 1997 applies to the circumstances set out in that tax return. The Commissioner will not accede to a taxpayer's request for an amendment to alter taxable income so that it reflects a different method of valuation. Nor will the Commissioner allow any part of an objection to an assessment that is based on the taxpayer's desire to choose a different method of valuation. This is because an assessment made in reliance on a taxpayer's chosen method of valuation, would have been made on a correct basis by applying the law properly to the facts as disclosed by the taxpayer.