Topic 5 Revision Notes
Topic 5 Revision Notes Overview of Trading Stock: •Receipts from the sale of trading stock is ordinary income and is therefore assessable under s6-5 -s70-115: includes insurance recoveries. That is if you lose trading stock and get insurance instead •Purchases of trading stock are deductible under s8-1 -s70-20: deems market value if non-arm’s length -s70-30: capital items that you hold that become trading stock are valued at cost or market value •Division 70 makes an adjustment for opening and closing values. It is a timing concept: you don’t get tax deduction in year you buy, rather you get it in the year you sell it. -s70-35(1): opening (on hand at the beginning of the year) and closing value (on hand at the end of the year) taken into account -s70-35(2): increase in the value of trading stock will form part of assessable income -s70-35(3): decrease in the value of trading stock will be deductible
Defining Trading Stock: •Under s70-10: Trading stock includes; anything produced, manufactured, acquired. Also includes anything that is held for the purpose of sale, manufacture or exchange in the ordinary course of business (thus raw materials will be trading stock). Trading stock also includes livestock, however, working animals are usually excluded as being trading stock (eg dogs on farms) •Trading stock need only be held for sale, and it does not have to be owned: •Sutton Motors 1985: -Sells cars -Manufacturer provides cars but do not ask them to pay for it until they are sold -Meaning Sutton Motors did not own these cars, and therefore they decided they did not have to value them as they did not own them -Court said trading stock is anything that is held for sale, and that it does not have to be owned -Therefore Sutton Motors had to value their stock •Shares can be trading stock if there purpose is for sale, not investment -IMF 1971 •Land can be trading stock, that is sub divided land that is going to be sold off -St Hubert’s Island Pty Ltd 1978 •Work in progress is included as trading stock, eg property that is partly developed -St Hubert’s Island Pty Ltd 1978
Trading Stock That Is Dealt With Differently: •Items that yield trading stock are not trading stock (eg fruit tree) -Hood Barrs v IRC 1957 (coal, clay, minerals are not trading stock until dug up) •Items are only trading stock once harvested (eg apples, wool off sheep’s back) •Work in progress of a professional is not trading stock -Sale of work in progress is assessable under s15-50. EG drawings by architect that are not fully finished are not trading stock as they have no value -Purchase of WIP is a capital and would be deductible under s25-95
Defining Trading Stock On Hand: •Under s70-35: if you are carrying on a business you compare the value of all your trading stock on hand at the start of the year with the end of the year •Trading stock is on hand when it is separated from capital -Stow Bardolph Gravel 1954 •Trading stock is when in possession, it need not be owned -Sutton Motors 1985 •If Trading stock is lost control of, it is not on hand -Farmsworth 1949: -Dispositive power test (meaning do you have the ability to sell it). If you have the ability to sell it is on hand. -Mrs Farmsworth was part of selling cooperative of fruit and veg -Farmers contributed all fruit and veg to this cooperative (to ensure they get a good price from buyers) -Mrs Farmsworth delivered stock to cooperative -Court agreed, and said she lost power to dispose of the fruit and veg -Mrs Farmsworth no longer owned or held the fruit and veg •Trading stock that is in transit and owned, is on hand. Need to ask who’s responsibility it is if stock is lost (if it is your responsibility then on hand, if sellers responsibility then not on hand) -All states frozen food 1990 Valuing Trading Stock On Hand: •Under s70-40: Opening stock = previous year Closing stock. •Under s70-45: The taxpayer must elect the value of trading stock on hand at the end of the year at either: -Cost -Market selling value -Replacement value •Under s70-50: If the trading stock is truly obsolete then can value at what is reasonable (eg outdated clothing) •Under s70-55: Natural increase (animals) the valuation is the option of the taxpayer, as working out cost would be almost impossible. However, there are minimum values.
Determining values: Market value:
Replacement value: Cost:
•Market value is in the ordinary course of business (does not include when items are forcefully sold) •Australian Jam: -Factory was destroyed by fire -They were selling of things that survived in large quantities at small prices -Court said market value has to be at normal sale value •As for market value……… •Includes absorption costs (fixed + variable), not direct costs (fixed only) •Phillip Morris Ltd v FCT 1970: -Was producing cigarettes, and wanted direct cost figure -They lost their case, and the court held they were required to incorporate the fixed costs
Abnormal Disposals of Trading Stock: •Under s70-D market value is deemed when:
Other Notes: •Sale of trading stock is ordinary income •Don’t ever say assessable under div 70 •Statutory income is when there is an increase in trading stock from the start of the year to the end of the year •Trading stock is specifically removed from the definition of a depreciating asset •Purchase of trading stock is a deduction •If decline in value of trading stock=specific deduction
Defining Trading Stock: •Under s70-10: Trading stock includes; anything produced, manufactured, acquired. Also includes anything that is held for the purpose of sale, manufacture or exchange in the ordinary course of business (thus raw materials will be trading stock). Trading stock also includes livestock, however, working animals are usually excluded as being trading stock (eg dogs on farms) •Trading stock need only be held for sale, and it does not have to be owned: •Sutton Motors 1985: -Sells cars -Manufacturer provides cars but do not ask them to pay for it until they are sold -Meaning Sutton Motors did not own these cars, and therefore they decided they did not have to value them as they did not own them -Court said trading stock is anything that is held for sale, and that it does not have to be owned -Therefore Sutton Motors had to value their stock •Shares can be trading stock if there purpose is for sale, not investment -IMF 1971 •Land can be trading stock, that is sub divided land that is going to be sold off -St Hubert’s Island Pty Ltd 1978 •Work in progress is included as trading stock, eg property that is partly developed -St Hubert’s Island Pty Ltd 1978
Trading Stock That Is Dealt With Differently: •Items that yield trading stock are not trading stock (eg fruit tree) -Hood Barrs v IRC 1957 (coal, clay, minerals are not trading stock until dug up) •Items are only trading stock once harvested (eg apples, wool off sheep’s back) •Work in progress of a professional is not trading stock -Sale of work in progress is assessable under s15-50. EG drawings by architect that are not fully finished are not trading stock as they have no value -Purchase of WIP is a capital and would be deductible under s25-95
Defining Trading Stock On Hand: •Under s70-35: if you are carrying on a business you compare the value of all your trading stock on hand at the start of the year with the end of the year •Trading stock is on hand when it is separated from capital -Stow Bardolph Gravel 1954 •Trading stock is when in possession, it need not be owned -Sutton Motors 1985 •If Trading stock is lost control of, it is not on hand -Farmsworth 1949: -Dispositive power test (meaning do you have the ability to sell it). If you have the ability to sell it is on hand. -Mrs Farmsworth was part of selling cooperative of fruit and veg -Farmers contributed all fruit and veg to this cooperative (to ensure they get a good price from buyers) -Mrs Farmsworth delivered stock to cooperative -Court agreed, and said she lost power to dispose of the fruit and veg -Mrs Farmsworth no longer owned or held the fruit and veg •Trading stock that is in transit and owned, is on hand. Need to ask who’s responsibility it is if stock is lost (if it is your responsibility then on hand, if sellers responsibility then not on hand) -All states frozen food 1990 Valuing Trading Stock On Hand: •Under s70-40: Opening stock = previous year Closing stock. •Under s70-45: The taxpayer must elect the value of trading stock on hand at the end of the year at either: -Cost -Market selling value -Replacement value •Under s70-50: If the trading stock is truly obsolete then can value at what is reasonable (eg outdated clothing) •Under s70-55: Natural increase (animals) the valuation is the option of the taxpayer, as working out cost would be almost impossible. However, there are minimum values.
Determining values: Market value:
Replacement value: Cost:
•Market value is in the ordinary course of business (does not include when items are forcefully sold) •Australian Jam: -Factory was destroyed by fire -They were selling of things that survived in large quantities at small prices -Court said market value has to be at normal sale value •As for market value……… •Includes absorption costs (fixed + variable), not direct costs (fixed only) •Phillip Morris Ltd v FCT 1970: -Was producing cigarettes, and wanted direct cost figure -They lost their case, and the court held they were required to incorporate the fixed costs
Abnormal Disposals of Trading Stock: •Under s70-D market value is deemed when:
Other Notes: •Sale of trading stock is ordinary income •Don’t ever say assessable under div 70 •Statutory income is when there is an increase in trading stock from the start of the year to the end of the year •Trading stock is specifically removed from the definition of a depreciating asset •Purchase of trading stock is a deduction •If decline in value of trading stock=specific deduction
