Trading stock is defined for tax purposes as including anything produced, manufactured or acquired that is held for the purposes of manufacture, sale or exchange in the ordinary course of business. Trading stock is basically the things in which a business trades.
A taxpayer is generally required to value each item of trading stock on hand at the end of an income year at its cost, its market selling value or its replacement value.
The best stock valuation method to adopt is the method that produces the lowest value of trading stock. In theory, if you have different classes of stock then you can use a different basis of valuation for each class as well as for each individual item of stock, although this can end up being a complicated calculation and therefore most businesses adopt a consistent method for all types of trading stock.
It is possible to change the method used each year so long as the figure for opening stock is the same as the closing stock figure from the previous year.
An annual stocktake is usually conducted by businesses to determine the value of trading stock on hand at 30 June. It makes sense to conduct this stocktake as close as possible to the financial year-end.
If the value of trading stock at the end of the income year is:
- More than at the start of the income year – the difference is added to your assessable income
- Less than at the start of the income year – a deduction can be claimed for the difference
Taxpayers can choose to apply the simplified trading stock rules for an income year if:
- Their aggregate annual turnover is less than $50 million, and
- The difference between the value of trading stock on hand at the start of that income year and the reasonably estimated value at the end of the year is $5,000 or less.
Where the simplified rules are applied, there is no need to perform a stocktake or value each item of trading stock at the end of the year. The value of stock on hand at the end of the year is instead deemed to be the same as the opening value, and there is no adjustment to assessable income or deductions to account for the actual change.
Where an item of trading stock is taken for personal consumption, such as a loaf of bread or some fruit, it is treated as if it has been sold to someone else so that the cost of the item is included in the taxpayer’s assessable income. Records which are ordinarily required to be kept to support this include the date the item is taken from stock, the reason the item is taken, a description of the item, and the cost of the item. A simple estimate of the cost of the stock taken is not sufficient under the tax law to support the claim.
Alternatively, business owners can apply a standard amount from the ATO for your industry. Taxation Determination TD 2021/8 outlines amounts that the Commissioner will accept as estimates of the value of goods taken from trading stock for private use by taxpayers, with amounts ranging from $920 per adult per annum for a butcher to $4,640 per adult per annum for a licensed restaurant/café. (TD 2021/8 | Legal database (ato.gov.au))
Damaged and obsolete stock can be written down or written off entirely and a tax deduction claimed. Therefore, if you have some old stock that your business cannot sell, consider writing it off before 30 June and get a tax deduction for it this year.
H&R Block can help you navigate the tax and accounting of owning investments to ensure you’re getting the most out of them. Explore our tax guides today via www.hrblock.com.au
Mark Chapman is director of tax communications at H&R Block.