Definition of Trading Stock

8.116. The present definition of trading stock is giving rise to difficulty in determining whether it embraces several classes of assets which are on occasions dealt with as stock in hand for financial accounting purposes. The assets in question generally fall into one of three groups:

  • (a) land held for resale;

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    (b) plant spares and consumable stores;
  • (c) shares, debentures and similar assets.

8.117. Land held for resale. In defining trading stock section 6 (1) uses the expression ‘anything …’ and sections 29 and 31 refer to ‘each article’ of trading stock. The question arises, whether land is to be regarded as trading stock. Opinion is divided, though it is understood that in practice the Commissioner treats land purchased by a dealer in land as trading stock. If land does not fall within the definition of trading stock, disposals by a land dealer other than in the ordinary course of business would not have to be valued at market value (section 36). Such a disposal would include, for example, a gift of land by a taxpayer, who might otherwise have been assessable on the sale of the land, to his wife. Where real property is held for resale by a taxpayer who is engaged in a business of trading in real property, the asset should, in the Committee's view, be treated for income tax purposes as trading stock and the definition should be amended to give this result.

8.118. Plant spares and consumable stores. The problem of plant spares held in stock for future use is of a different nature. The items do not fall within the present definition of trading stock as they are not acquired or manufactured for the purpose of sale. In addition, they are not articles depreciable as ‘plant’ because they are not ‘installed ready for use’. Thus while the cost of items actually used in repairs during the income year are deductible, any loss on sale or scrapping of spare parts for which the taxpayer has no use is a capital loss and not deductible. Consumable stores such as oils, lubricants, protective clothing, cleaning materials, etc., which are used in manufacture but do not form part of the finished product also do not constitute trading stock for the purposes of the Act: they may be deductible in full in the year of purchase. In this regard the taxation treatment differs from the accounting treatment where such stock have a significant value. The Committee recommends that provision be inserted in the Act which will permit supplies on hand, including plant spares, to be treated on the same basis as trading stock.

8.119. Shares, debentures and similar assets. Another area of doubt is whether the definition of trading stock extends to shares, debentures and similar assets. This question was considered by the Ligertwood Committee which proposed that the definition should not be extended to include such assets: to do so would permit the deduction of unrealised losses on some of them without regard to unrealised gains on others.

8.120. A decision of the High Court in 1971 has substantially resolved this question in relation to shares,note but the Committee believes the position of all these assets needs clarification.

8.121. There are circumstances where the profits on sale of property may be assessable income, even though the taxpayer is not classified as a dealer in such property and the property is not within the definition of trading stock. An example is where the varying of investments and turning them to account is an essential feature of the business: it has been held that the profit on realisation of portfolio investments by banks, life insurance companies and some investment trusts is assessable income under section 25 of the Act. In the Committee's view these assets should be treated as trading stock if they are to be subject to income tax. If they are not treated as trading stock, these profits should be subject to capital gains tax.

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8.122. The Committee sees merit in the point raised by the Ligertwood Committee, referred to in paragraph 8.119. When shares, debentures and similar assets are treated as trading stock for income tax purposes, the basis of valuation elected under the trading stock provisions should be applied not to individual assets but to all assets falling within a particular class: for example, to all debentures or to all shares.