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Taxation Determination

TD 92/198

Income tax: when can a taxpayer elect the replacement price method for the valuation of trading stock under subsection 31(1)?

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FOI status:

may be releasedFOI number: I 1213761

This Determination, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953, is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Determination is a public ruling and how it is binding on the Commissioner. Unless otherwise stated, this Determination applies to years commencing both before and after its date of issue.

1. To elect replacement price as a method of trading stock valuation, the items must be available in the market and be substantially identical to the replaced items. The replacement price is the amount the taxpayer would have to pay in his normal buying market on the last day of the year of income.

2. There may also be situations where the use of replacement price is not an option under subsection 31(1). In Parfew Nominees Pty. Ltd. v FCT (1986) 17 ATR 107, (1986) ATC 4673 the taxpayer, whose trading stock was strata title units, elected the replacement price method. In the circumstances of that case, the court refused to accept replacement price valuation based on a notional calculation of constructing the same building on the same site as the basis of calculation defied business reality.

Example: 1

(i)
ABC Pty. Ltd. deals in office furniture. Its trading stock includes 1 metre high filing cabinets with 3 shelves. When ABC Pty. Ltd places an order for more filing cabinets it is informed that the 1 metre high cabinets are only manufactured with 2 shelves and not 3.
The replacement price method is acceptable in this situation as the cabinets are considered substantially identical.
(ii)
Assume the same situation as above but the only filing cabinets available on the market are now 1.5 metres high with 4 shelves.

The replacement price method is not appropriate in this situation as the cabinets are not considered substantially identical.

Example: 2

XYZ are dealers in antique furniture.
As it is unlikely that these items of furniture can be replaced, the use of replacement price is not appropriate. XYZ can only elect cost price or market selling value.

Commissioner of Taxation
10/12/92

Previously issued as Draft TD 92/D183

References

ISSN 1038 - 8982

Related Rulings/Determinations:

CITCM 497,
IT 2648

Subject References:
Trading stock,
replacement price method

Legislative References:
ITAA SS31(1)

Case References:
Parfew Nominees Pty. Ltd. v FCT
(1986) 17 ATR 107
86 ATC 4673

TD 92/198 history
  Date: Version: Change:
You are here 10 December 1992 Original ruling  
  29 November 2006 Original ruling + note Repeal provision note
  2 February 2011 Consolidated ruling Addendum

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