Taxation: Accounting for Inventory & Trade Stock for Tax Purposes

This assignment solution addresses the principles of taxation and accounting for inventory and trade stock, focusing on the Income Tax Assessment Act and its implications for businesses. It analyzes a case study involving a gazebo chair seller, detailing how revenue, costs of goods sold, and inventory balances impact taxable income. The solution covers the classification of trade stocks, the impact of obsolescence, and the application of Goods Sales Tax (GST). The assignment also examines the classification of spare parts as trade stock for a computer servicing business, considering their role in facilitating operations and generating economic rewards. The paper emphasizes the importance of stocktaking, valuation, and compliance with tax regulations, offering insights into deductible costs and allowable expenses. The solution provides detailed calculations and interpretations of tax implications, offering a comprehensive understanding of the subject matter.

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Accounting for Inventory & Trade Stock for Tax Purposes
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Question 1;
Income Tax Assessment Act requires that all entities in operation making
profits or loss to declare their respective tax return obligation at the end of each financial year
as referred cited by Kirchler(2010.Pg 340).The act further emphasizes the need to include all
gross earning and sale proceeds revenue generated for tax purpose in the books as assessable
income. Accounting for inventory is so vital that no firm can’t ignore its’ accountability
simply because is an item that rotates across cash i.e. from purchases to sales thus a great
contributor to value addition tax.
Tony is seen from the information available to be conducting the business of
selling both new and repaired gazebos chairs. From this, of course, the conclusion can be,
made that Tony gets revenue from sales of six chairs each at $500 thus generating $3000 as
well as from sales of four repaired gazebos that earned him $78 revenue. However, the
revenues are subjected to deductible allowable cost and expenses as illustrated below;
Cost of manufacturing the chairs sold =$250*6=$1500
Repaired Chairs cost =$20
Replacing Cost i.e. the 8 Chairs=$15*8 =$120
All these costs relate to the above revenue of $3078 thus can use them to arrive at the
net profit before tax of=$3078-$1500-$20-$120=$1438, this profit is what that worth to be
subjected to tax. If we were to subject the revenue to tax without netting off the cost, of
course, the tax obligation would be high however the ATO proclaims irrational sense in
accounting for revenue without expenses or costs. Tony’s costs of gazebos relating to
inventory balances worth to be classified as deductible allowable for tax purposes.
Inventory balances should be considered for tax purposes as per the set regulation in
Sec 28 of Income Tax Assessment Act. This is to be conducted through physical stocktaking

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which defines the balances as at the start and end of the financial year. Any change in stocks
whether under, over or at constant state has different implication on the taxable income.
We most all agree that in a manufacturing or business set up that involves usage of
raw material at respective stages, of course, we can’t miss the aspect of the cost of sales. In
Tony’s Sale of gazebos business there exist cost of sales items whose accountability has been
achieved through;
Opening Stock + Purchases - Closing Stock=Consumption
Opening and Closing stocks are attained through stock taking and each one of them
has an impact on the taxable income individually for example; 2015/2016 Tony did not have
opening balances in real sense the stocks worth $25 is what he acquired and what was seen to
be the closing balance thus dictating that Tony did not have any cost of sales items in that end
of 2016 since the effect on cost of sales=$0+$25-$25=0, this is therefore seen to contribute
to increasing the taxable income since there are no deductions resulting from it
Cernius(2016.Pg17).
Trade inventory balances are seen to determine Tony’s sales position. This is so
through changes happening in the balances i.e. a firm commencing its operation as at the end
of the year the only exception for stock differences to be summed in the assessable income.
The decrease in stocks especially closing balances greatly contribute to allowable deductible
balances whereas an increase shoots up the tax assessable income as referred by Cernuous
(2016.Pg 67).
According to Australian Taxation Law Office trading stocks is defined to be whatever
firms produces, makes, manufactures or acquires for the sole consumption purposes in
manufacturing, selling and in exchange processes. It is prudent to know that for an inventory
to qualify to be a trading stock the test of finding out whether the latter item facilitates
operational processes in yielding economic reward benefit Knur(2014.Pg38).

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The act requires an entity to account for trading stocks through stocktaking so as to determine
closing stock balances at hand as at start and close of the year. It is deemed that a trader
taxable income is ascertained through stock valuation more so while accounting for cost of
sales items
Tony’s income going with the set roles on stocks balances is seen to be changing the
assessable income upwards during period 2015/2016 whereas 2016/2017 the opening balance
is seen to be less than the closing balance as it is seen to shoot up the value to $35.
Yr 2016 COS 5 second hand gazebos=0+$25-$25=0
Yr 2017 COS=$25(Opening Stock+$30(Purchases)-$35(Closing Stock) =$20
$35(Closing Stock Valuation) =1 chair from the 5 bought 2nd hand=1*$5=$5
It is from the above synopsis that Tony’s gazebo for new and repaired chairs is seen
to account for trading stocks Guo(2012.Pg87). The gazebos are seen to generate economic
rewards hence worth to be classified as trading stocks.
Obsolescence means not in use or outdated thus creating as the aspect of loss
Cannella(2015.Pg124) that has to be accounted for in the books. Tony’s nominal value of $1
undervalues or understates stock value thus creating stock or inventory loss. By virtue of
record keeping the stock, the loss is assigned to counter income thus treated as allowable
deductions for tax purposes. An obsolete stock is further seen to reduce the balances of stocks
hence subjecting the latter for tax purposes Kök(2014.Pg100).
Upon analyzing Tony’s business we are dutiful to conclude that he deals with trade stocks
acquired externally while some he locally adds value to it. The stocks are either acquired or
sold via purchases or sales Date (2005.Pg17). The law thus advises accountability of goods
sales and purchase through payment of input and output tax aspects.Tony is therefore advised
to register for Goods Sales Tax purpose so as to counter the GST input tax

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McCarthy(2011.Pg61) from purchases and sales output tax Evans(2011.Pg140). Use of Good
Sales Tax will control and create efficiency in Tony’s operation as well as facilitating tax
burden planning. Tony need to register for GST so as to be claiming taxes he paid while
purchasing the gazebos this should be used to set off output tax. Although this GST on
purchases is claimable upon registration and upon purchase there exist instances where you
pay for inventory you already had at hand before registration.
Inventory at hand is mostly as result of purchase made thus as at the time of making
the purchase GST was charge on this purchase thus always leaving the seller and buy with
the task of accounting for this charge for tax purposes. Input tax results from purchases made
while output result from sales made the two as per GST regulations should contra each other
and thus allowing for tax refund or tax payable.
Question 2;
Although anything held for the sole need of facilitating smooth operations in a firm is
what is classified as trade stock. The main course of business for this taxpayer is servicing
and selling computers, therefore, anything that contributes to this course whether tangible or
intangible should be treated as trade stocks. Servicing of these computers can’t be complete
in absence of the spare parts thus classifying the spare parts as trade stocks.
These spare parts since they are used to facilitate operations with economic reward
expectation it qualifies to be a trading stock Wong(2007.Pg 380). Likewise, since they stand
on its own individual traits without any alteration for identifiable purposes they qualify to be
trade stock.
Since the spare parts are disposable in nature upon transfer to customers after
servicing it qualifies it to be trade stock.

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Despite the fact that the computers are leased, the taxpayer is still seen to use the spare parts
to service the items that had already generated reward, from this, therefore, the conclusion is
that the spare parts are classified as trade stocks.This is so because they are used to render
maintenance service. However, the classification is only applicable if the spare parts period is
that of less than a year or a year of which in our case an assumption of it being used for one
year is applied.
Spare parts are therefore classified depending on the time aspect whereby if it’s used
to operate an asset for duration less than a year then it worth classified as trade stock and vice
versa. Likewise, the classification is made on the purpose or sole use of the spare part
whereby if it’s used for rendering any service like in our case maintenance or for production
purpose.

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