Tax Implications of Trading Stock Valuation: A Case Study

This assignment presents a case study analysis focusing on the valuation of trading stock, specifically addressing the application of absorption costing and the treatment of obsolescence within the context of Australian taxation law. The analysis references key legislation, including the ITAA 1936 and ITAA 1997, and relevant taxation rulings such as TR 2006/8. The first part of the assignment examines the valuation of gazebo chairs, considering the implications of obsolescence and the method of writing down stock. The second part addresses whether spare parts should be treated as trading stock, examining the case of a business selling and servicing computers. The assignment references several court cases and taxation rulings to determine the classification of spare parts as trading stock. It also considers whether the spare parts are held for permanent purpose or for probable future requirements of the customers. The assignment concludes that the spare parts are a part of trading stock.

Answer to question 1:
The contemporary case study is related with the ascertainment of the alternative
methods of accounting for the gazebo chairs. The taxation rulings of TR 2006/8 is applicable
in this context for valuing the trading stock for the taxpayers under the retail or the wholesale
business (Barkoczy 2016). The ruling is applicable in the case of Tony so that the taxpayer
can select to price their trading stock in hand at the conclusion of the financial year under
cost in respect of the “subsection 70-45 (1) of the ITAA 1997”.
As defined under the “subsection 70-45 of the ITAA 1997” it permits the taxpayer to
price the item of the trading stock on hand at the conclusion of the year of revenue at cost. It
has been stated under the corresponding provision of the “subsection 31 (1) of the ITAA
1936” that allows the taxpayers to value their entire article under the cost price (Saad 2014).
Similarly, the taxpayers transacting in retail and wholesale industries that worth their trading
stock in hand by using the absorption method of costing for the taxation purpose.
As stated in the absorption method of estimating the cost must be engrossed for the
income tax purpose by including the price of purchase and any direct or indirect method of
expenditure concerning the trading stock during the normal course of business in carrying
trading stock of tradable nature to the saleable conditions. As held in the case of “Philip
Morris Ltd v. FC of T 79 ATC 4355; (1979) 10 ATR 44” the taxpayer used the method
direct costing in to value the trading stock (Woellner et al. 2016).
With the help of this approach the cost that is attributed to the trading stock comprises
of the cost of resources and the remunerations of those workers that executed the operations
during the course of manufacturing. Similarly, the Tony should value the gazebo chairs by
using the method absorption costing for income tax purpose by together with the price of

purchase and the price of direct and indirect cost that is followed in course of the business
operations.
Subsection 31 (1) of the ITAA 1936 provides the methods of valuation that is
available to the taxpayer at the time of valuing the trading stock in hand following the
conclusion of the financial year (Robin 2017). “Subsection 31 (2)” provides the officer with
a option of determining the reasonable fair value of valuing trading stock due to the reason of
obsolesce connecting to the trading stock and it is lesser than the value that could be
considered to be appropriate under the “subsection 31 (1)”. As evident from the current
situation of Tony it is found that reported certain units of the gazebo chairs which had
become obsolesce and had a nominal value of $1.
In the present context of Tony subsection 31 (2) of the ITAA 1936 the obsolesce
represents becoming out of usage, becoming out of date, going outdated represents obsolesce
stock (Anderson, Dickfos and Brown 2016). The taxpayer in the present context reported an
sum which consisted of the value of the stock that could not be sold. As the over-all
regulation, any form of stock, which an individual taxpayer retains on the hand, should
attribute certain worth.
As held in the case of “Australasian Jam Co. Pty Ltd v FC of T (1953) 88 CLR 23”
the court in its judgement has stated that the stock that is held by the taxpayer who generally
does not transact in items that are obsolete does not possess any selling value under the
“subsection 31 (1)” (Tran-Nam and Walpole 2016). Therefore, an individual taxpayer having
any obsolete stock that rests on hand must be valued at its scrap value. Stock can be only
valued in respect of the subsection 31 (2) following it has been clearly understood that the
specific stock has begun to become obsolete.

Because of this, the method of revaluing the stock is usually regarded as the method
of writing down the stock (Coleman and Sadiq 2013). At the time of witting down the stock
for a just and sensible value the taxpayer might mark a “once-off write down”. As evident
from the current study Tony had reported certain item that will not be sold. Under such
context the Tony in the present situation can undertake the method of once-off-writing down
stock. Under this method tony can write down only that portion of stock that at the
conclusion of the income year that has reasonably become obsolesce and the same will not be
sold in the market.

Answer to question 2:
The present reading is based on the ascertainment of the issue whether the spare parts
will be treated as the trading stock. As obvious from the existing circumstance, it is found
that the taxpayer sold and serviced computers. The spare parts that was purchased by the
taxpayers formed the part of the business. The “taxation ruling of TR 98/8” is dealing with
the determination of whether the materials and spare parts that was held by the taxpayer for
delivering service constitutes trading stock (Grange et al. 2014). According to the section 70-
10 materials and spare parts that is held by the taxpayers with the objective of supply to the
customers will be considered as the trading stock inside the normal concept of the word given
that the taxpayer performed the business of providing service to the customers.
As evident in the present case study the taxpayer performed the business activities of
selling and servicing computers by replacing the defective parts in the computers that was
sold. The selling and replacing of spare parts will be considered as the activities of trading
stock in the current context since they are inside the ordinary connotation of the trading stock.
The law court in the case of “John v. Federal Commissioner of Taxation (1989) 166 CLR
417” has specified the definition of the trading stock (Kenny 2013). The judgement of the
high court stated that the materials or the spare parts will be considered as the trading stock
for the purpose of income tax given that they are inside the connotation of the word devoid of
the help of the definition which represents trading stock in ordinary sense. The stock in the
current context are not held for permanent purpose and it is generally held on hand for
probable future requirements of the customers.
As held in the case of “Inspector of Taxes v. Higgs [1974]” the term trade is
generally put into use to signify the functions of the marketable aspects through which the
dealer delivers the consumers for return of some form of goods or services (Krever 2013).

Citing the reference of “FC of T v. Suttons Motors (Chullora) Wholesale Pty Ltd (1985)” in
the present context, spare parts retain the character or nature as the necessary part of the
service that is within the meaning of the trading stock and these things are regarded as trading
stock.
On the other hand, if the taxpayer only leased the computers to the others and made
use of the spare parts to remedy the defect of the leased computers would also constitute to be
a portion of the trading stock within the ordinary connotation of section 70-10 (Morgan,
Mortimer and Pinto 2013). The taxation ruling of TR 93/20 defines that there should be an
association among the property and the business where an assertion can be bought forward by
stating that the property holds the depiction of one or additional of the kinds innumerate not
in overall sense however in particular relations to the commerce that is performed.
In order to consider the property that is being traded as the trading stock there should
be an asset of the occupational of dealing in that stock. The business of the computer supplier
in the present context was engaged in the activities of the servicing and retailing computer
equipment both in the form of sale and maintenance of the computer equipment along with
the replacement of the faulty portions (Woellner 2013). The theory of trading stock as
defined by the court of law in the case of Memorex that do not needs a supplier’s only
occupational to be trading in the spare parts in order to establish parts as the trading stock.
In spite of the fact that the computer supplier in the present case entered in the
business of leasing and maintenance agreements that might adequately be considered as the
agreements for labour and materials instead of considering the same as the contracts for sale
of goods. This cannot be considered as adequate to accomplish that the spare parts does not
establish as the trading stock. In spite in the current scenario the taxpayer leased the
computers but replacement of the defective parts as interpreted by the federal court represents

trading stock. The taxpayer traded in the goods that are claimed as the part of trading stock
and replacement of spare parts to remedy the defect will be constitute in the present context
as the trading stock.

Reference List:
Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.
Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’
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Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian
Taxation Law Select: Legislation and Commentary 2016. Oxford University Press.
ROBIN, H., 2017. AUSTRALIAN TAXATION LAW 2017. OXFORD University Press.
Anderson, C., Dickfos, J. and Brown, C., 2016. The Australian Taxation Office-what role
does it play in anti-phoenix activity?. INSOLVENCY LAW JOURNAL, 24(2), pp.127-140.
Tran-Nam, B. and Walpole, M., 2016. Tax disputes, litigation costs and access to tax
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Coleman, C. and Sadiq, K. (n.d.). 2013 Principles of taxation law.
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Kenny, P. (2013). Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.
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Morgan, A., Mortimer, C. and Pinto, D. (2013). A practical introduction to Australian
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