trading stock

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					Taxation of Business and
  Investment Income
         Weeks 4 and 6:
Statutory regime for trading stock
            accounting
         What is trading stock?
• ITAA97 s 70-10:
• Two limbs:
  – Ordinary meaning;
  – Inclusive expansion.
• Statutory meaning of ‘trading stock’ not
  synonymous with ‘inventory’
             Ordinary meaning
• Items of property which the taxpayer supplies to
  customers as core part of trading activity ie:
  – TR98/8: stock that is:
     • held in carrying on business; AND
     • supplied in ordinary course of, and as essential part of,
       that business; AND
     • Is stock comprising materials that are separately
       identifiable both before and after the supply; AND
     • the property in the stock passes to customer;
  – TR98/7 - packaging
           Inclusive expansion
• Acquisition of goods ie goldmining TR 93/3
• ‘Livestock’ – ITAA97 s 995-1:
  – includes beasts of burden used in primary
    production business (ie dairy herd [Wade]; bees
    used for honey production [TD2008/26])
   Trading stock - specific examples
• Undeveloped land held by property developer – St
  Hubert’s Island
• Shares held by share trader – Investment &
  Merchant Finance
  – Can factored debts be trading stock ‘on hand’? (cf
    Modern Permanent and Investment Society v FCT (1958)
    98 CLR 187 per Williams J)
• Work in progress –
  – unfinished goods can be trading stock: St Hubert’s Island
  – Work in progress for service provider cannot be trading
    stock (and nor is cost included in assessable income at
    year end)- Henderson
 Trading stock – specific examples
• Assets yielding trading stock:
  – Timber on land – ITAA97 s 70-120
       Trading stock accounting
• Exclusion of trading stock from CGT: ITAA97 s
  118-25
• Small business simplified trading stock
  accounting: ITAA97 Div 328
 Trading stock accounting framework
• Cost deductible under ITAA97 s 8-1 when
  ‘incurred’
  – Subject to trading stock being ‘on hand’ – ITAA97 s 70
    -15
      • (note, s 70-15 overrides Raymor)
• Section 70-35:
  – Compare value of trading stock on hand at start of income
    year to trading stock on hand at year end:
     • Increase from year start to year end is assessable;
     • Decrease from year start to year end is deductible.
• Interaction with amendment period limits:
  Energy Resources of Australia (1993) – amendment
  of prior year opening value possible, notwithstanding that
  corresponding closing value cannot be amended
        Trading stock ‘on hand’
• Does the taxpayer have dispositive power? –
  Farnsworth
  – Normally taxpayer must have property in items, but
    note dispositive power of taxpayer in Suttons Motors
  – Dispositive power may exist, despite taxpayer not
    having possession of goods – All States Frozen Foods
• Note operation of Sale of Goods legislation ie
  Goods Act 1958 (Vic):
  – Unascertained goods
  – Specific goods/ascertained
          Trading stock ‘value’
• Options available under ITAA97 s 70-45:
  – Cost
  – Market selling price
  – Replacement price
• Special elective valuation rules:
  – Obsolete stock – ITAA97 s 70-50;
  – New livestock from natural reproduction – ITAA97
    s 70-55
                  ‘Cost price’
• Australasian Jam – Fullagar J notes confusion
  arising from ‘cost price’, considers ‘cost price’
  means ‘cost’
• Acquisition cost of trading stock:
  – Includes all costs incurred in obtaining stock as well
    as locating it at point of sale (ie freight, duty,
    delivery)
  – FIFO – accepted in Australasian Jam
  – Average cost
  – Standard cost – Australasian Jam
              ‘Cost price’ (cont’d)
• Cost of producing/manufacturing trading stock:
   – Philip Morris –
      • cost price means all costs to bring stock to saleable state;
      • For manufactured goods this means full absorption costing
      • Actual cost = direct material cost + direct labour cost + direct
        factory overhead cost + allocation of indirect factory
        overhead cost
      • IT 2350, TR 2006/8
• Cost of land that is trading stock:
      • Kurts Development
Other measures of trading stock value
• Market selling price:
   – Australasian Jam – market selling price based on
     hypothetical sale in ordinary course of business,
     rather than disposal of ‘surplus’ stock in bulk sale at
     year end
   – Note to ITAA97 s 70-45 – market selling value may not
     be the same as ‘market value’
   – Must be a market in the items that are ‘trading stock’
     – Barina Corp
• Replacement value
   – Must be a market in the items to determine the
     ‘replacement price’ - Parfew
     Acquisition of Trading Stock
• ITAA97 s 70-20: market value substitution
  where acquisition of trading stock for inflated
  price under non-arm’s length dealing
     • Also note transfer pricing rules: ITAA36 Part III, Div 13;
       DTAs
• ‘Non-arm’s length dealing’ –
  – Note difference from ‘arm’s length relationship’
  – Trustee for the Estate of the late AW Furse
  – Granby
  – Collis
  – Axa (2009)
                  ‘Market value’ – Spencer:
Griffith CJ:
   The test of value of land is to be determined, not by inquiring what price a
   man desiring to sell could actually have obtained for it on a given day, ie
   whether there was in fact on that day a willing buyer, but by inquiring:
   “What would a man desiring to buy the land have had to pay for it on that
   day to a vendor willing to sell it for a fair price but not desirous to sell?” (at
   432)

Isaacs J:
   To arrive at the value of the land at that date, we have … to suppose it sold
   then, not by means of a forced sale, but by voluntary bargaining between
   the plaintiff and a purchaser, willing to trade, but neither of them so anxious
   to do so that he would overlook any ordinary business consideration. We
   must further suppose to be perfectly acquainted with the land, and
   cognisant of all circumstances which might affect its value, either
   advantageously or prejudicially including its situation, character, quality,
   proximity to conveniences or inconveniences, its surrounding features, the
   then present demand for land and the likelihood, as then appearing to
   persons best capable of forming an opinion, of a rise or fall for whatever
   reason soever in the amount which one would otherwise be willing to fix as
   to the value of the property. (at 441)
                    Market value
• Possibility that arm’s length dealing may not arrive at market
  value price:
  • distinction between actual value and market value (see
     Perpetual Trustee, discussed in Benwerrin)
• Case 2/99, Edge:
   – Must determine appropriate market;
   – Restrict Australasian Jam to its facts – hypothesized forced
     sale inappropriate for taxpayer trading as going concern, as
     opposed to an actual forced sale by generally accepted
     method (ie mortgagee auction);
   – ‘hard headed bargaining between arm’s length parties
     negotiating in a market contemplated by the legislature’
         Market value (cont’d)
• Commissioner’s practice statement – PS LA
  2005/8
• Commissioner’s guidance:
  http://www.ato.gov.au/businesses/content.asp
  ?doc=/content/00161737.htm&page=1&H1
• Private rulings can include making a market
  value determination – TAA53 s 359-40
   – However, note TR 2006/11 – ATO not obliged
     to obtain valuation, and can charge fee for
     valuer’s valuation
   Disposal of trading stock outside
     ordinary course of business
• ITAA97 s 70-90 – deemed market value proceeds
• Outside ordinary course of business:
  – Consider:
     • Scope of business;
     • Type of transactions that that business ordinarily entails;
     • Nature of particular transaction.
  – Pastoral Development – disposal of trading stock to
    associate at price substantially below what associate
    was to receive is outside ordinary course of business
  – Wade – compulsory acquisition and destruction of
    dairy not disposal outside ordinary course of business

				
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posted:7/30/2013
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