1. Your clients include a large city hotel and an amusement park.

Go to the Inland Revenue

website www.ird.govt.nz and locate the DV (diminishing value) and SL (straight line)
depreciation rates, and the estimated useful life (in years) for the following:

(a) Dance floor

For the hotels, motels, restaurants, cafes and takeaway bars category and Leisure
category, the diminishing value is 10% and the straight line value is 7%.
(b) Ferris wheel
Under Leisure category, the diminishing value is 10% and the straight line value is
7%.
(c) Karaoke system
Under Leisure category, the diminishing value is 40% and the straight line value is
30%
(d) Mini golf course
Under Leisure category, the diminishing value is 13% and the straight line value is
8.5%

2. Gardening Made Easy Ltd manufactures lawn mowers and hedge trimmers. It supplies
its product to hardware stores and garden centres throughout New Zealand. Gardening
Made Easy Ltd has a 31 March balance date and in the past has always valued its stock
at year end at ‘cost’ for tax purposes.
The company has been making losses in the current year and two previous years due to
high overhead and interest costs. The shareholders, Mr and Mrs Apiata, are considering
selling the business and retiring.
Year end (31 March 2018) has passed and Mr and Mrs Apiata have been discussing the
sale of their shares with a prospective purchaser.
The estimated value of stock on a cost basis at 31 March 2018 is as follows:
Lawn mowers 35,000
Hedge trimmers 15,000
50,000

The estimated market selling value of that stock (based on gross margins achieved in the
last two years) at 31 March 2018 would be:
Lawn mowers 75,000
Hedge trimmers 20,000
95,000

(i) Can Gardening Made Easy Ltd choose to value its 2018 closing stock at market
selling value for tax purposes?
No. The market selling value is broadly the amount that the taxpayer would
normally expect to receive, in the ordinary course of business (i.e. selling price):
s EB 11 ITA 2007. Certain direct selling costs (costs usually incurred for
transport, sales commissions and discounts to buyers) may be deducted in
calculating market selling value if they have been taken into account for financial
reporting purposes. There is also no longer the ability for provision for obsolete
or slow moving stock to allow a lower closing stock figure – this ability was
 repealed in 1996/97. This is on the basis that the market selling value should allow
for obsolescence.

(ii) If it chose to, could Gardening Made Easy Ltd value the stock of lawn mowers at
market selling value and value the stock of hedge trimmers at cost?

Any taxpayer may value their trading stock at the end of an income year at cost.
If cost is used, the taxpayer must include and allocate costs in accordance with
‘generally accepted accounting practice’ (GAAP) for inventory and the valuation
must be materially correct - s EB 6(1) ITA 2007. A taxpayer has not complied
with GAAP if the value of closing stock is materially different from the value
obtained by applying the New Zealand equivalent to International Accounting
Standard, NZ IAS-2: Inventories [EB 6]. (See NZT examples 11.2 Transport
Costs Not Included for GAAP & 11.3 Transport Costs Included for GAAP).

This method means taxpayers do not have to incur the compliance costs of
preparing separate ‘tax’ valuations for stock valued at cost. Instead taxpayers can
use financial reporting standards to value stock at cost for tax purposes.

The value of closing stock, based on NZ IAS-2, is adjusted for any variance
between actual costs incurred and costs budgeted for. A small amendment was
introduced to make it clear that such variances, which are to be pro-rated against
trading stock sold that year and that are on hand at year end, are not to be treated
entirely as assessable income or an allowable deduction in the year of the
variation; (ss EB 8 and EB 17 ITA 2007). (See NZT examples 11.4 Cost Valuation
of Trading Stock & 11.5 Valuation of Manufactured Stock at Cost).

(iii) What advantages would arise from valuing the 2018 closing stock at market selling
value?

Valuing closing stock at market selling value would mean certain direct selling
costs (costs usually incurred for transport, sales commissions and discounts to
buyers) may be deducted in calculating market selling value if they have been
taken into account for financial reporting purposes. This would result in a profit
gain as you would be able to earn more than what the stock is originally valued
at. This gain is also not taxable as it is a capital gain.