VALUING OF TRADING STOCKS

Dominion, Volume 33, Issue 118, 12 February 1940, Page 8

VALUING OF TRADING STOCKS

Official Explanation

PREVENTION OF SECRET RESERVES Dominion Special Service. < AUCKLAND, February 10. Various explanations have been given of the directions in section 16 ot the Land and Income Tax Amendment Act. 1939, regarding the valuation of stock-in-trade. The provisions are important to the commercial community, as they are designed for income tax purposes to prevent what are generally known as “secret reserves)” in stock. Subsection (4) states that “the value of the trading stock of any taxpayer to be taken into account at the end of any income year shall be, at the option of the taxpayer, its cost price, its market selling value or the price at which it can be replaced.” In reply to an inquiry, the Commissioner of Taxes hasi explained, that the taxpayer is not bound to value the whole of his stock at cost, market selling value or replacement cost. He may, for example, value part of his stock at cost, part consisting of special lines to which special considerations apply at market selling value, and the remainder at the price at which it can be replaced. In such cases each line or group of articles must be separately considered, and the taxpayer must make a choice of which basis is to be adopted for each of those groups. It is intended to allow a taxpayer to continue the sound practice of wilting down to market selling value stock-in-trade which has depreciated by change of fashion, physical deterioration or any other cause which has reduced the value of the goods below cost price. The commissioner's interpretation of the subsection is that the market selling value may be taken as the total sale price expected to be received from a whole line of goods which has been valued on that particular basis. In very exceptional cases, market selling value may be used for single articles selected individually, but generally this basis would be adopted only in respect of a whole line of goods. For instance, a retailer might consider that his remaining stock of summer frocks included some which would have to be sent to the bargain counter, while others could be carried forward at cost. In that case the whole of the frocks destined for tlie bargain counter must be valued at a figure representing the total sale price expected to be realized. Generally, tlie commissioner states, it is not intended to disturb approved commercial methods of valuing stock-in-trade which do not conflict with the amended legislation. Its primary purpose is to instruct taxpayers thtit, having valued stock-in-trade in accordance with the provisions of the section, they may not reduce that valuation iu order to create secret reserves.