Preamble
Some gold producers have on hand at balance date stocks of gold bearing ore, whose gold content is below the cut off grade for processing, but have been stockpiled for processing at a later date if the price of gold rises and/or costs fall. These stocks may have been valued under subsection 31(2) at a lower than market or nil value.
Subsection 31(2) gives the Commissioner a discretion to determine a fair and reasonable value of trading stock, that by reason of obsolescence, or any other special circumstances relating to the trading stock, is less than the lowest value that could be applied under subsection 31(1). It is intended to apply particularly where taxpayers would be disadvantaged in valuing stock under the existing bases provided in subsection 31(1), for example in the case of articles of trading stock such as discontinued lines, obsolete items and spare parts for which there may only be a sporadic market.
As indicated by Taxation Ruling TR 93/3, the notional market value of gold ore is calculated by taking the spot price of gold, less the estimated future costs, less the profit margin of the purchaser. Although not unknown, it would be a rare situation where low grade ore is actually purchased on the market.
The application of subsection 31(2) is limited in the case of low grade ore stocks which represent the early stages of work in progress, and have a largely notional market value. Fluctuations in gold prices cause the market valuation of these stocks to vary, and the market value may fall below cost. These fluctuations are a normal occurrence with all metals, including gold, and do not constitute special circumstances for the purpose of subsection 31(2).
If a notional market value is capable of reasonable estimation, it must be applied before subsection 31(2) is considered. However, if there is no prospect of the trading stock having any future market value, and the producer has no intention of further processing these stocks, a nil value may be justified in terms of subsection 31(2).