Taxation Law Question

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Taxation Law – Unit 7_Question 2

2.Crowbar Ltd has the following items of stock on hand at 30 June 2010. Its opening value for stock for items A, B, C on 1 July 2009 was:

Units of stock ABC
Valued at cost18,00019,00011,000

Its closing values for stock for items A, B, C on 30 June 2010 were:

Units of stock ABC
Cost$10,000$10,000$15,000
Replacement cost$11,000$3,000$7,000
Market selling value$14,000$2,000$18,000

Part 1Advise Crowbar Ltd of the deductions available to it in respect of its purchases of trading stock.

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...
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