When land, raw materials and spare parts are involved
Scenario:
Our company (The Manny Group) is primarily in the business of manufacturing, selling, repairing and hiring out equipment used by landscape gardeners. As a secondary business, we are also involved in the acquisition of land for development and sale as residential blocks and own a property in the Southern Highlands that is used as a tourist resort.
My question is, whether the following items should be treated as its trading stock for 2016/17:
- Land that we purchase, develop and sell as residential blocks;
- Raw materials used in the manufacture of equipment;
- Spare parts acquired for use in its business of repairing equipment;
Explanation:
Trading stock is defined in ITAA97 s 70-10, and is basically the things in which a business trades; This statutory definition of trading stock is not intended to be exhaustive; A particular item may be trading stock in the hands of one taxpayer but not in the hands of another; The purpose of an item being held in the ordinary course of business is a primary consideration.
- Land that your organisation purchases, develops and sells as residential blocks
Land may be trading stock in the hands of a land dealer even it is not yet in the condition (FC of T v St Hubert’s Island Pty Ltd 78 ATC 4104); A single acquisition of land for the purpose of development, subdivision and sale by a business commenced for that purpose leads to the land being trading stock (Taxation Determination TD 92/124)
The land owned by your organisation for subdivision and sale can be valued as an item of trading stock when the subdivided blocks become marketable.
Before such time, the entire unsubdivided land will be regarded as an item of trading stock (Barina Corporation Ltd v DFC of T 85 ATC 4186)
- Raw materials used in the manufacture of equipment
According to All States Frozen Foods Pty Ltd v FC of T 90 ATC 4175, In its ordinary meaning, raw materials to be incorporated into manufactured products are the taxpayer’s trading stock.
- Spare parts acquired for use in its business of repairing equipment
Spare parts for the repairs on equipment that is hired out to customers would not be trading stock, but that may be trading stock if a separate charge is levied for the parts when they are supplied in the course of providing repair services (Taxation Ruling TR 98/8). The spare parts would not be trading stock if the supply of the parts is only a minor aspect of the service being provided to the customer.