Disposal of trading stock for less than market value

Sections GC 1 and EB 24(1) of the Income Tax Act 2007 have been amended to correct an unidentified change in legislation, as identified by the High Court in Foodstuffs (Wellington) Co-Operative Society Limited v CIR (2010) 24 NZTC 23,959 (CIV 2009-485-1224). Section GC 2(3) has been consequentially amended to update the cross-reference to the correct subsection in section GC 1. The amendments are retrospective to the commencement of the 2007 Act.

In the High Court decision of Foodstuffs (Wellington) Co-Operative Society Limited v CIR, France J identified that section GC 1 of the 2007 Act contained an unintended change in legislation.

The particular issue before the Court was whether the market value of shares (held as trading stock), which were cancelled on an amalgamation, was income of the shareholder. The Court held that section GD 1 of the 1994 Act (which corresponds to section GC 1 of the 2007 Act) applied and the market value of the shares was income of the taxpayer.

The taxpayer's argument was that section GD 1 required a recipient before it could apply. The Court rejected that argument, holding that section GD 1 did not require a recipient, noting that the section could apply to a sole trader who withdrew trading stock from the business for private consumption, which also did not require a recipient to be a separate person.

As originally enacted in the 2007 Act, both sections GC 1 and EB 24(1) apply to a disposal of trading stock for less than market value by one person to another person.

Section GC 1 has been retrospectively amended to ensure that the sections do not require a recipient of the trading stock, as held by the High Court in relation to the corresponding provision in the 1994 Act (section GD 1 of the 1994 Act).

Section EB 24(1) has been consequentially amended as this provision stems from the same policy background as section GC 1 and contains the same unintended legislative change as was identified by the Court in relation to section GC 1.

Application date

The amendment applies from the beginning of the 2008–09 income year. As the High Court released its decision on 28 October 2009, the amendment includes a savings provision to protect taxpayers who have taken a tax position on the basis of the wording of section GC 1 or EB 24(1) in a return of income filed before 28 October 2009.