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Edited version of your private ruling
Authorisation Number: 1012466849514
Ruling
Subject: Trading Stock
Question
Are goods which are used to replace end user's defective products under warranty, considered trading stock?
Answer
No
This ruling applies for the following periods
1 January 2011 - 31 December 2011
1 January 2012 - 31 December 2012
The scheme commenced on
1 January 2011
Relevant facts
The entity provides after sales service to customers.
The company is a service provider only and not involved in the sale of the products.
End users either buy products from distributors in Australia or directly from overseas (including from the entity's parent entity).
Once it is established that a product is faulty the entity receives the goods back from the end user and distributes the goods, which are under warranty, back to the parent company.
The only money which changes hands is a service fee which the entity charges the parent entity for the service it provides.
The parent entity pays all the expenses that the entity incurs.
The company is not a trading but a service company.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 70-10
Reasons for decision
Section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997) states trading stock includes:
· anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business; and
· live stock.
· but does not include a Division 230 financial arrangement.
In this case faulty goods, which are under warranty, are received back from end-users and the entity arranges for the goods to be sent back to its parent entity. The goods are not produced, manufactured or acquired for the purpose of manufacture, sale or exchange in the ordinary course of the entity's business. It is in the business of collecting faulty goods and arranging for them to be returned to the entity's parent entity. The entity is in effect an agent of the parent entity. The goods do not meet the definition of trading stock under Division 70 of the ITAA 1997.
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