ACC3005 Tax Law Assignment: Trading Stock and Tax Implications

This document presents a comprehensive solution to an ACC3005 Tax Law assignment. The assignment addresses the accounting and tax implications of trading stock, using case studies involving the sale of gazebos and computer spare parts. The analysis covers key issues such as the valuation of trading stock (including new and second-hand items), the treatment of obsolete stock, and the assessability of such stock under Australian tax law. The solution examines the application of relevant sections of the Income Tax Assessment Act 1997, including the definition and valuation of trading stock. Detailed calculations are provided to determine the value of closing stock, considering factors like cost, market selling price, and replacement cost. Furthermore, the assignment explores the tax implications of computer spare parts, considering scenarios involving direct sales, repairs, maintenance agreements, and computer leasing. The solution clarifies whether spare parts are considered trading stock under various circumstances, referencing relevant tax rulings. The document provides a strong foundation for understanding the nuances of trading stock valuation and its tax implications.

ACC3005/304
Tax Law Assignment

TABLE OF CONTENTS
Question 1..................................................................................................................................3
Case description and legal provisions associated with it.......................................................3
Case analysis and Assessability of trading stock...................................................................3
Question 2..................................................................................................................................5
Case description and legal provisions associated with it.......................................................5
Case analysis and Assessability of trading stock...................................................................6
References..................................................................................................................................7

QUESTION 1
Case description and legal provisions associated with it
Tony carries on business that involves the sale of new gazebos and the repair and sale of
secondhand gazebo chairs. Issues are
(a) How to account these chairs for income tax purposes at 30 June 2017?
(b) Whether the gazebos and gazebo chairs constitute trading stock?
(c) Are there any alternatives available to him in accounting for the various transactions?
(d) Accounting for obsolete units and the difference from above method of accounting?
As per the Australian taxation provisions, accounting for income tax purpose is for
production of the overall result to reflect the activities with trading stock in a year. According
to Section 70(10) of the Income Tax Assessment Act 1997, "Trading stock" means anything
that is produced or acquired or manufactured, which is held for the purposes of sale or
exchange or manufacture in the course of business (Valuing trading Stock, 2017).
According to Section 70(10) of the Income Tax Assessment Act 1997, an item of trading
stock in hand at the end of an income year shall be valued at cost or its market selling value
or its replacement value (Blakelock and King, 2017).The term 'obsolescence' refers to stock
which is going out of use; or going out of date, or becoming unfashionable or outmoded1.
The accurate value of the obsolete stock will be scrap value if this stock can be sold as scrap
(TR 93/23. Income tax: valuation of trading stock subject to obsolescence or other special
circumstances, 2006). If it cannot be sold as scrap but remains on hand, it may be valued at
nil.
Case analysis and Assessability of trading stock
In the given case, Tony manufactures the gazebo and second-hand gazebo chairs which are
his trading stock at the end of the income year; which can be valued either at cost or selling
price or replacement cost; also a different method can be chosen each year for different items
of stock. The obsolete item shall be either valued at nil or its scrap value, whichever is the
case.
Working note
Value of trading stock of New Gazebos based on the cost:
1 Jam Co. Pty Ltd v FC of T (1953) 88 CLR 23 at 31

Item of Cost Value (in $)
Labour 70
Material 80
Factory Overheads 100
Total 250
No. of new Gazebos manufactured 10
No. of new Gazebos sold 6
Closing Stock of New Gazebos 4
Value of closing stock of new Gazebos 1000
Value of second-hand Gazebo Chairs:
Particulars No. Value/piece(in $) Total Value(in $)
Opening stock 5 5 25
Purchase 3 10 30
Total 8 55
Market selling price 20
Cost of replacing 15
No. of chairs sold 4 78
Closing stock 4
Since the new gazebos and second-hand gazebo chairs are manufactured and acquired for the
purpose of the sale will form part of the trading stock. By considering the above calculation,
Value of the 4 new gazebos at 30 June 2017 will be $1000. Since the market selling value
differs from the market value of the item, closing value of 4-second hand gazebo chairs can
be taken at the replacement cost of $15 for each chair, which totals to $60. The nominal value
of $1 to be taken as the value of obsolete units.

QUESTION 2
Case description and legal provisions associated with it
According to the given case taxpayer sells and services computers. Spare parts purchased as
part of this business are used either to replace defective parts in computers sold or to fix
computers maintained. Thus issue, in this case, is to determine
(a) Whether these spare parts will be considered as trading stock?
(b) What if the taxpayer is engaged in the leasing of computers to other individuals and
utilise the spare parts for the resolving defects in the leased computers?
Spare parts held in stock by a computer supplier are considered as trading stock if they are
used by the supplier in the following ways2:
 Direct sale.
 Repair of any equipment with a separate charge.
 Repair of a customer's equipment under an agreement of maintenance with periodical
maintenance charge (TR 93/20.Income tax: computer spare parts, 1993).
 Repair of a customer's equipment under warranty.
 Repair of new or used computer equipment purchased for the purpose of making
further sales3.
 Manufacturing the computer equipment for making a further sale.
At times, a computer is sold or leased to a purchaser with either warranty of voluntary,
contractual or statutory nature where a warranty service is provided by labour and parts for a
certain period at no cost to the customer (Barkoczy, 2017). At the expiry, they enter into a
maintenance agreement where computer supplier is required to maintain the customer's
equipment in good condition including the replacement and removal of defective parts
(Wilson, Freeman and Freeman, 2015). The customer pays an annual maintenance fee in lieu
of warranted services in the provision of a repair-on-demand service.
2 Subdivision B of Division 2 of Part III of the Income Tax Assessment Act 1936 (ITAA)
3 FC of T v. Sutton Motors (Chullora) Wholesale Pty Ltd 85 ATC 4398

Case analysis and Assessability of trading stock
In the current case, the taxpayer is making sales of computers as well as repairing computers
for which a maintenance agreement has been entered. Thus both the categories fall under the
criteria where spare parts will be considered as a trading stock.
Under the lease agreement where the taxpayer would lease computers and repair leased
computers with its acquired spare parts, an annual maintenance fee is charged by the supplier.
Unless the service provided is other than the agreement, no further charges are collected from
the customer. Therefore these spare parts fall under the statutory list given above.
Spare parts used are used either to replace defective parts in computers sold or to fix computers
maintained under maintenance agreements will be considered as the trading stock in this case. If
the taxpayer only lease computers to its customers and make use of the spare parts to remedy
defects in the leased computers, still these spare parts will form part of the trading stock as the
lease agreement is nothing but another type of warranty or maintenance agreement, where the
supplier assures the customer of maintaining the equipment in workable condition during the
tenure of agreement.

REFERENCES
Books and journals
Barkoczy, S., 2017. Core Tax Legislation and Study Guide. OUP Catalogue.
Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching.
Proctor, The, 37(6), p.18.
Wilson, V., Freeman, S. and Freeman, J., 2015. Accounting: A Practical Approach. Pearson
Higher Education AU.
Online
TR 93/20.Income tax: computer spare parts. 1993. [Online]. ATO references: NO NO
92/8618-7 ISSN 1039 – 0731. Available through <
https://www.ato.gov.au/law/view/document?docid=TXR/TR9320/NAT/ATO/00001>.
[Accessed on 2nd October 2017].
TR 93/23. Income tax: valuation of trading stock subject to obsolescence or other special
circumstances. 2006. [Online]. ATO references: NO 92/9428-7 ISSN 1039 - 0731 Available
through < http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9323/NAT/ATO/00001>.
[Accessed on 2nd October 2017].
Valuing trading Stock. 2017. [Online]. Available through <
https://www.ato.gov.au/business/income-and-deductions-for-business/reconciliation-
activities/accounting-for-trading-stock/valuing-trading-stock/>. [Accessed on 2nd October
2017].