Tax relief for donated trading stock

Section GZ 3 of the Income Tax Act 2007 and section 73B of the Estate and Gift Duties Act 1968

The new legislation provides tax relief for businesses that have made, or are contemplating making, donations (or supplies for less than market value) of trading stock for relief from the Canterbury earthquakes.

Changes introduced in the new Act provide that:

• an anti-avoidance rule applying to disposals of trading stock at below market value does not apply to disposals of trading stock by a person to a person who is not an associated person for the purpose of relief from the adverse effects of a Canterbury earthquake in the period beginning on 4 September 2010 and ending on 31 March 2012; and
• a gift by a person to a person who is not an associated person shall not constitute a dutiable gift if the gift is of trading stock, and made for the purpose of relief from the adverse effects of a Canterbury earthquake, and made within the period beginning on 4 September 2010 and ending on 31 March 2012.

Background

Generally (with a few limited exclusions), a person who disposes of trading stock for no consideration, or an amount that is less than the market value of the trading stock at the time of disposal, is treated as deriving an amount equal to the market value of the trading stock at the time of disposal.

Gift duty is also payable on dutiable gifts made by a person if they exceed an aggregate value of $27,000 in a 12-month period. For gift duty purposes, a gift is something given, other than by will, when the person making the transfer (the donor) does not receive fully adequate consideration in money or money's worth.

Following the Christchurch earthquake on 22 February 2011, public calls were made to Ministers and officials seeking legislation to provide tax relief for donated goods, especially trading stock donated by businesses.

On 28 March 2011, the Minister of Revenue and the Minister of Finance released details of proposed changes to tax legislation agreed to by Cabinet, including an exemption so that businesses do not have to pay tax or gift duty on trading stock they have donated within four months of either the 4 September 2010 or 22 February 2011 Canterbury earthquakes.

In response to feedback received following this announcement, Cabinet agreed to extend the eligible period for the tax relief so that it covered the period beginning on 4 September 2010 and ending on 31 March 2012.

Key features

Donations of trading stock for relief of Canterbury earthquakes

New section GZ 3 of the Income Tax Act 2007 provides that section GC 1 (Disposals of trading stock at below market value) does not apply to the disposal of trading stock by a person to a person who is not an associated person:

• for the purpose of relief from the adverse effects of a Canterbury earthquake, as defined in section 4 of the Canterbury Earthquake Recovery Act 2011; and
• in the period beginning on 4 September 2010 and ending on 31 March 2012.

The meaning of "trading stock" in new section GZ 3 is that contained in section EB 2 of the Income Tax Act 2007.

Exemption for certain gifts of trading stock

New section 73B of the Estate and Gift Duties Act 1968 provides that a gift by a person to another person who is not associated under the Income Tax Act 2007 will not be subject to gift duty if the gift is:

• of trading stock as defined in section EB 2 of the Income Tax Act 2007;
• made for the purpose of relief from the adverse effects of a Canterbury earthquake, as defined in section 4 of the Canterbury Earthquake Recovery Act 2011; and
• made within the period beginning on 4 September 2010 and ending on 31 March 2012.

Application date

The application date for the changes providing tax relief for donated trading stock is 4 September 2010.