Value of goods taken from stock for private use: expert commentary

Many small businesses find it difficult to determine the value of the goods taken from stock for private use. This difficulty is compounded by saleable goods containing a range of ingredients, such as in the case of a bakery, as the assessable amount is not the market value of the saleable item taken for personal consumption but the cost of the individual ingredients.

As an administrative concession for certain industries, the Commissioner publishes each year the amounts that he will accept as an estimate of the value of goods taken from trading stock for private use. This concession relieves these taxpayers from having to track individual stock items for this purpose. It also allows them to retain a deduction for the purchase of the trading stock even though some of it was used for private use, provided they return the amount of the estimate of goods for private use in their assessable income.

Background

The Commissioner recently issued his annual determination TD 2021/1 (the Determination) which provides an update of amounts that the Commissioner will accept as estimates of the value of goods taken from trading stock for private use by taxpayers in named industries for the 2020–21 income year.

Indexed each year, the annual assessable amount is now as high as $13,380 for a mixed business (includes a milk bar, general store and convenience store) for a family of two adults and two children no older than 16 years.

Schedule for the value of goods taken from trading stock for private use in the 2020–21 income year

Source: TD 2021/1

Section 70-110 of the Income Tax Assessment Act 1997 applies when a taxpayer stops holding an item as trading stock but still owns it. In this case, they are treated as if:

(a) just before it stopped being trading stock, they had sold it to someone else (at arm’s length and in the ordinary course of business) for its cost; and

(b) they had immediately bought it back for the same amount.

So when a taxpayer takes stock for personal consumption, they are treated as having sold it for its cost and this amount is assessable income. Although they are also treated as having bought back the stock for the same amount, it is not deductible because the stock is for personal consumption.

Many small business find it difficult to determine the value of the goods taken from stock for private use. This difficulty is compounded by saleable goods containing a range of ingredients, such as in the case of a bakery, as the assessable amount is not the market value of the saleable item taken for personal consumption but the cost of the individual ingredients.

As an administrative concession for certain industries, the Commissioner publishes each year the amounts that he will accept as an estimate of the value of goods taken from trading stock for private use. This concession relieves these taxpayers from having to track individual stock items for this purpose. It also allows them to retain a deduction for the purchase of the trading stock even though some of it was used for private use, provided they return the amount of the estimate of goods for private use in their assessable income.

Where a taxpayer considers the values provided in the schedule in the Determination do not reflect their particular circumstances, they may elect to maintain suitable records of items taken from stock for personal use.

Issues

No equivalent for GST

The Determination applies only for income tax purposes; there are no equivalent amounts published for GST purposes. To the extent that the stock purchased by a sole trader was subject to GST, ATO has not issued clear guidance for sole traders.

GSTD 2009/2 explains the GST consequences when a partner in a partnership takes goods held as trading stock for private or domestic use (a supply is taken to be made by the partnership to the partner because, for GST purposes, the partnership is a separate entity to the partner who takes the goods).

Business carried on by a company or a trust

Section 70-110 and the Determination apply only if the taxpayer continues to hold the stock. This can occur only when the stock is consumed by the same taxpayer who originally purchased the stock. This can happen only in the case of businesses carried on by sole traders and partnerships of individuals.

If the business is carried on by a company or trust, the consumption of the stock by the owners of the business represents a transfer of ownership of the stock to a different entity, and section 70-110 and the Determination cannot apply. This is not commonly understood by many businesses and some practitioners.

The following tax implications must be considered where the owners of a business carried on by a company or a trust take goods from stock for private use:

(a) There is a disposal of the trading stock outside the ordinary course of business under section 70-90 which requires the company or trust to include the market value of the item on the day of the disposal (i.e. generally the day of consumption) in its assessable income;

(b) If the individual is an employee (or an associate of an employee) of the company or trust, and the goods taken are provided in that capacity, the transfer of the stock can constitute the provision of a property or residual fringe benefit and the FBT provisions may apply, subject to any exemptions or exclusions; and

(c) If the individual is a shareholder (or an associate of a shareholder) of a private company, the transfer of the stock can constitute a payment under section 109C(3)(c) of the Income Tax Assessment Act 1936 i.e. the provisions in Division 7A may apply. If the stock is taken from a trust, there are no Division 7A implications.

There is no legal or administrative basis for a company or a trustee of a trust to apply the amounts published by the Commissioner and record them as a journal (often recorded as: DR loan | CR assessable income – goods for private use). These entities must reflect the actual value of goods taken as a disposal of stock outside the ordinary course of business, and consider any FBT or Division 7A consequences.

The argument that recording the ATO’s published amounts is easier and better than doing nothing would not stand up in a court of law in a dispute.