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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value (Blakelock and King, 2017).The term 'obsolescence' refers to stock which is going out of use; or going out of date, or becoming unfashionable or outmoded[1].  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.

Value of trading stock of New Gazebos based on the cost:

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.

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

• Whether these spare parts will be considered as trading stock?
• 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 ways[2]:

• 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 sales[3].
• Manufacturing the computer equipment for making a further

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.

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

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.

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 2^nd 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 < https://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9323/NAT/ATO/00001>. [Accessed on 2^nd 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 2^nd October 2017]