Income tax: a wholesaler of computers loans demonstration computers ('demonstrators') to prospective purchasers (including retailers) on the basis of 'approval or return'. The wholesaler retains ownership at the time of providing the demonstrators. Are the demonstrators 'trading stock on hand' of the wholesaler for the purposes of subsection 28(1) of the Income Tax Assessment Act 1936?

Yes, where at the end of the income tax year the prospective purchasers are still yet to contractually agree to the purchase of the demonstrators. This follows from the wholesaler acquiring the demonstrators for the purpose of sale or exchange and still retaining dispositive power over them. Income Tax Ruling IT 2670 provides an extensive discussion on the meaning of 'dispositive power'.

No, where at the end of the income tax year the prospective purchasers have agreed to purchase the demonstrators. This follows from the wholesaler now having entered into a contract of sale for the demonstrators and therefore no longer having the dispositive power.

Where the demonstrators are trading stock on hand as at the end of the income tax year, the value of each demonstrator will, at the option of the wholesaler, be its cost price, market selling value or replacement cost.

This determination also applies to other industries and taxpayers which lend out equipment under similar circumstances. Example: The wholesaler has 37 demonstrators with prospective purchasers at the close of business on 30 June. During the weeks prior to 30 June the wholesaler had been advised that 13 of these demonstrators would be purchased. The tax return of the wholesaler will show 24 of the demontrators as trading stock with the other 13 being treated as sales.