ACC3005 Tax Law

Question 1

Tony carries on business that involves the sale of new gazebos and the repair and sale of secondhand gazebo chairs. All units are identical and indistinguishable. Tony provides you with the following information in relation to the business:

(a) In relation to the new gazebos, manufacturing began on 1 July 2016. Costs associated with the production of each unit were:

Labour $70
Materials 80
Factory overheads 100

During the year ended 30 June 2017, 10 gazebos were manufactured, of which 6 had been sold at a sale price of $500 each.

(b) In relation to the repaired gazebo chairs:

(i) In 2015/16 Tony bought five secondhand gazebo chairs at a price of $5 each. There were no sales and no other purchases in that year, and the closing stock for that year was shown for tax purposes to be $25;
(ii) Tony bought three chairs in the year ended 30 June 2017 at a price of $10 each.
(iii) the market selling price of such chairs at 30 June 2017 was $20 each;
(iv) the cost of replacing such chairs at 30 June 2017 was $15 each.

During the year, four repaired gazebo chairs were sold for $78.

You are required to advise Tony on how to bring the gazebos and gazebo chairs to account for income tax purposes at 30 June 2017. This will require you concluding as to whether the gazebos and gazebo chairs constitute trading stock of Tony’s business and, if so, the alternatives available to him in accounting for the various transactions.Would it make any difference if Tony was of the view that certain units were obsolete and had a nominal value of $1?

Question 2

A taxpayer sells and services computers. Spare parts are purchased as part of this business. They are not sold directly to the public, but are used either to replace defective parts in computers sold, or to fix computers maintained under maintenance agreements.

Discuss whether the spare parts constitute trading stock. How would your answer differ if the taxpayer only leased computers to others and used the spare parts to remedy defects in the leased computers?