4.5 Trading Stock (11)

Question 1

Trading stock is defined in s 1 of the Act and includes:

Answer 1

(a) Anything -
(i) produced, manufactured, constructed, assembled, purchased or in any other manner acquired by taxpayer for the purposes of manufacture, sale or exchange; or
(ii) the proceeds of which will form part of gross income

(b) any consumable stores and spare parts acquired to be used or consumed in course of trade

Question 2

In practice trading stock includes

Answer 2

Anything held with the intention to dispose of it at a profit.
Section 22 provides that opening stock must be deducted from income and closing stock must be added to income in determining taxable income.
Cost of stock deducted is matched to stock sold
Cost of sales = opening stock + purchases – closing stock

Question 3

Closing stock – s 22(1)

Answer 3

Closing stock on hand at year end must be accounted for at cost less any amount which Commissioner accepts as reasonable representing the amount by which stock has decreased in value (eg: result of damage, deterioration, change in fashion)
Financial instruments may not be written down

Question 4

Practice note 36 requires following from taxpayers who have valued their stock at less than cost:

Answer 4

● Must disclose the fact if they have valued stock at less than cost
● Reasons must be given
● Method must be disclosed

Question 5

Opening stock – s22(2) includes

Answer 5

● Closing stock held at end of previous year
● Assets which were on hand at beginning of year but only became trading stock during current year as a result of change of intention of taxpayer (market value on date of change of intention)

A capital gain will be triggered when a capital asset becomes trading stock as a result of change in intention. Proceeds deemed to be received will be market value at date of change of intention.

Question 6

Construction work-in-progress – s22(2A)

Answer 6

Any taxpayer who carries on construction, building, engineering or any other trade which involves improving fixed property owned by someone else is required to include work-in-progress in trading stock

Question 7

Construction work-in-progress – s22(3A)

Answer 7

Deals with the valuation of such construction work-in-progress and provides that the amount to be included is the sum of:
● Materials used in effecting improvements
● Direct costs - incurred directly in connection with relevant contract
● Indirect costs - portion of any other costs incurred in connection with relevant contract

Question 8

AS per GAAP direct costs include:

Answer 8

● Cost of materials
● Site labour costs
● Depreciation of plant and equipment used on site
● Cost of moving materials, plant and equipment to and from site
● Directly related costs of design and technical assistance

Question 9

As per GAAP indirect costs include

Answer 9

● Insurance
● Construction overheads

Question 10

Non-trade disposal of trading stock – s 22(8) – Private or domestic consumption of stock

Answer 10

Where a taxpayer applies trading stock for private or domestic use he will be deemed to have recovered / recouped the cost of stock. Recoupment will be added to income (market value if value can’t be determined)
If the stock is used in course of carrying on trade the recoupment will be deemed to be expenditure incurred for acquisition of asset and deductible.

Question 11

Non-trade disposal of trading stock – s 22(8) – Other non-trade disposals of stock

Answer 11

Where a taxpayer had:
● Donated trading stock
● Disposed of trading stock otherwise than in the course of ordinary trade
● Distributed stock
● Applied trading stock for any purpose other than in ordinary course of trade
● Changed intention with regard to trading stock and subsequently treated as capital asset

He is deemed to have recouped the market value of such stock.
If stock is sold at less than market value he is deemed to recover the difference between market value and proceeds received.