Taxation Law Question

Part 2Advise Crowbar Ltd as to which value of closing stock it should choose at 30 June 2010 on the basis that the company wishes to minimise its taxable income. Would your answer be different if Crowbar Ltd had carry-forward losses from a prior income year? Part 3 What difference would it make to your answer if Crowbar Ltd had an average annual turnover over the previous 4 years of $800,000? Part 1: As Crowbar Ltd has remaining stock on hand at the year-end, it is necessary for the company to take into account any unsold trading stock which is held by the taxpayer at the time as stated under Section 70-35 of ITAA 1997.

Trading stock provisions allow a deduction for the cost of stock that is actually sold. Under Section 70-35(2), ITAA97, where the value of the closing stock at the end of the year exceeds the value of the opening stock at the beginning of the year, the difference is assessable income. Furthermore under s70-35(3), where the value of the opening stock exceeds the value of the closing stock, the difference is a deduction. Part 2: It is in the best interest for Crowbar to select a method of stock valuation that minimises its taxable income.

Under Section 70-45(1), ITAA (1997) 31(1), the taxpayer has the option to value trading stock on hand at the end of the year either cost price, market selling value, replacement price or as stated under s70-50, ITAA (1997) {31(2)}, a lower value in special circumstances if commissioner is satisfied. Crowbar Ltd Unit of StockValuation MethodLowest Cost ($) ACost Price$10,000 BMarket Selling Value$2,000 CReplacement Price$7,000 Total$19,000 Opening Stock Unit A + B + C -$48,000 Stock Value-$19,000 Claim Deductions $29,000

If Crowbar Ltd had carry-forward losses from a prior income year: In this situation, it is advisable for Crowbar Ltd to maximise the value of its closing stock. For companies with carry-forward losses, it can offset those losses against its income for the current year. Crowbar Ltd (with Carry-Forward Losses) Unit of StockValuation MethodLowest Cost ($) AMarket Selling Value$14,000 BCost Price$10,000 CMarket Selling Value$18,000 Total$42,000 Part 3 What difference does it make to your answer if Crowbar Ltd had an average annual turnover over the previous 4 years of $800000?

An entity that is carrying on a business that has an annual turnover of less than $2 million s328-110 of ITAA 1997 is considered a small business entity therefore it shows that Crowbar Ltd is a small business entity as it has an average annual turnover of $800000 in the 4 previous years. This leads to meeting the criteria under Section 328-285(1) where you can choose not to account for changes in the value of your trading stock for an income year and the difference between the value of your trading stock on hand at the start of an income year and the reasonably estimated value at the end of the income year is not more than $5,000.

Crowbar Ltd can choose replacement cost at end of the year, which is 11,000 + 3,000 + 7,000 = 21000. The difference between opening which is $48,000 and end which is $21,000 is $27,000 which more than 5,000. Therefore Crowbar Ltd needs to: * Value each item of trading stock on hand at the end of the income year, or * –ย Account for any change in the value of trading stock on hand. * If a SBE taxpayer chooses to account for changes in the value of trading stock for an income year, the taxpayer will have to do a stocktake and account for changes in the value of trading stock.

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