Trading stock Flashcards
What are the proceeds from the sale of trading stock and what section is applicable
Is trading stock capital, and relevant section
What are expenditures incurred in purchasing trading stock classified and relevant section
What sort of asset is trading stock
Proceeds from the sale of trading stock constitute ordinary income assessable under s 6- 5
Trading stock expressly deemed not to be of a capital nature s 70-25
Expenditure incurred in purchasing trading stock is an outgoing necessarily incurred in carrying on a business deductible under s 8-1
Trading stock is a revenue asset
How does CGT affect trading stock, sections
Can depreciation be claimed for trading stock, section
What is the GST received on trading stock classified as, section
What is the treatment of input tax credit when acquiring trading stock, section
Capital gains and losses made in relation to trading stock are disregarded for CGT purposes s118-25(1)
Deductions cannot be claimed under the capital allowance rules in respect of trading stock, as trading stock is not a “depreciating asset” s 40-30 (1)(b)
To the extent that an amount received by a taxpayer in respect of the sale of trading stock represents GST charged on a taxable supply, it is non-assessable non-exempt income s 17-5
To the extent that an amount paid to acquire trading stock relates to an input tax credit, it is not deductible s 27-5
( what is an input tax credit )
How wide is the definition of trading stock, section
What is the main factor that determines whether an item is trading stock
What is the definition of trading stock, section
Can trading stock include capital goods, and when does this occur
Trading stock is defined very broadly under s 70-10
Whether an item is trading stock depends on the purpose for which it is held, not its underlying nature
A trading stock includes: S 70-10 ITAA97
Anything produced, manufactured or acquired, That is held for the purposes of manufacture, sale or exchange, In the ordinary course of business
Trading stock can include items that are normally classified as capital if it is in the ordinary course of business
Land held by a developer: St Hubert’s Island (1978)
Share Held by the share trader
live stock
When must a tax payer value trading stock, section
When is excess of trading stock deductible and accessible
Taxpayer must compare all the value of their trading stock on hand at the start of the income year with their trading stock on hand at the end of the income year. S 70-35 (1)
(double check the above)
Excess is assessable= Closing stock > Opening stock S 70-35(2)
Excess is deductible= Closing stock
When can does expenditure incurred on a trading stock be deductible
Expenditure incurred in purchasing trading stock is deductible in the year it becomes “on hand”. Otherwise you deduct the trading stock on the first year it become the trading stock on hand.
What does it mean for the tax payer to have stock on hand
What are the three relevant cases which apply to stock on hand
For trading stock to be “on hand”.
Taxpayer must have the power to dispose of the trading stock, Taxpayer must have the power to dispose of the trading stock, Taxpayer need not necessarily have physical possession of the trading stock
Taxpayer must have the power to dispose of the trading stock.— Farnsworth 1949 – the fruit grower was part of an association of fruit growers that sent their fruits to a packing house that packages and ultimately sold the produce. Once the taxpayer delivered it to the packing house it ceased to be on hand for the taxpayer as she no longer had power to dispose of it.
Taxpayer need not necessarily have legal ownership of the trading stock — Suttons Motors (1985) – A taxpayer company that acted as car wholesaler, the cars were owned by a finance company but were displayed in showroom of retail companies within the Sutton motors group. Sutton motors (taxpayer) did not own the car but had them on display in their showroom available for sale. The courts held the cars were trading stock to on hand since the car were in its position and at the risk of the company and were held for the purpose of sale in the ordinary course of business.
Taxpayer need not necessarily have physical possession of the trading stock —-All states Frozen Foods (1990) - The taxpayer purchased goods and received legal title upon them, but on year end the good were still on route, it argued that the goods were not in hand since it had not received them. The court held that the goods were on hand since according to GAAP goods in transit for which title has passed need to be included in the stock of the buyer rather than the seller even though the goods have not been physically received.
When can a tax payer choose to value each item of stock, what is the implication of this , section
Explain the three method of valuing trading stock, and possible times that it can happen
S 70-45
Taxpayer can choose to value each item of stock on hand at the end of each income year,
- Cost
GST is ignored under cost method
Actual cost includes appropriate cost of bring stock to its existing location and condition
Full absorption costing Philip Morris Case (1979) – include full labour costs and relative portion of overheads for bringing the goods to its present conditions. - Market Selling value
Value from sale in normal market in ordinary course of business. (does not necessary imply the market value i.e in unusual circumstances, force sale of stock) Australasian Jam Co case (1953)
Possible appropriate use: Stock is fallen out of fashion and the value has fallen below costs and the business need to sell it at market. - Replacement Value
Amount the taxpayer is required to obtain identical item in normal buying market.
Stock isn’t often measured at the replacement price as it is a little bit more difficult to value.
Where stock has experienced a significant decline in value i.e. importing business, and increase it exchange rate makes it much cheaper to import the stock relative to when we purchased it.
What is the opening value of stock based upon, section
what are the rules for valuation of different items and valuation in different years.
How can a tax payer elect to value stock if trading is obsolete
If the objective of the tax payer is to minimize the taxable amount what values should be chosen
The closing value of the stock in Year 1 will automatically become the opening value of the stock in year 2 (S 70-40)
Taxpayer can use different valuations methods for different items of stock . Taxpayer can switch valuation methods from year to year
Can elect alternative value if trading stock is obsolete S 70-50. Stock that is obsolete you can argue the value is NIL under S 70-50
If the objective the taxpayer is to minimize the taxable amount then you choose the lowest value, since your opening stock is the value from the previous year your closing stock will take the lowest value by using the lowest value.
What are the special rules in regards to the valuation of trading.
3 points
Trading stock is not acquired at “ Arm’s - Length “ and for more than its market value, must be valued at its market values S 70-20
An item that is not originally held as trading stock become trading stock s 70-30
S 70-80. Situation that an item is no longer trading stock other than the sale in the ordinary course of business
Trading stock is disposed of outside the ordinary course of business
A fractional disposal of trading stock take place
The owner of trading stock dies
An items is no longer held as trading stock by the tax payer still owns it.
What are the small business entity Concessions.
How does a business qualify for a small business
Small business entities only need to account for changes in the value of their trading stock where they reasonably estimate that the difference between opening and closing value exceed $5 000
Annual turnover is less than 2m for it to be a small business
