Small business clients can use simpler trading stock rules. If you are a small business entity and at the end of the income year estimate that your trading stock’s value has not changed by more than $5,000, you can choose not to conduct a formal stocktake — you will therefore not be required to account for the changes in the trading stock’s value.
The estimate for this purpose (an election to use the “simplified trading stock rules”) will be deemed to be reasonable by the ATO if either:
you maintain a constant level of stock each year and have a reasonable idea of the value of stock on hand
stock levels fluctuate, but you can make an estimate based on records of the stock purchased.
A small business will need to use the general trading stock rules (more below) if the difference in trading stock value has varied by more than $5,000.
Another thing to remember is that an increase in trading stock value over the year is assessable income, while a decrease is an allowable deduction.
The general rules The general trading stock rules apply if the value of trading stock changes by:
more than $5,000
$5,000 or less if a business owner chooses to do a stocktake and account for the change in value.
A business can choose to do a stocktake and use the general trading stock rules even if they are eligible to use the simplified trading stock rules.
Using the general trading stock rules, they must do an end-of-year stocktake and record the value of all trading stock they have on hand at both:
the beginning of the income year
the end of the income year.
The value of stock at the end of an income year is usually the same as its value at the start of the next income year. However:
if for some reason the value of closing stock is more than that of opening stock, the business must include the difference as part of their assessable income
if the value of closing stock is less than that of opening stock, it can reduce assessable income by the difference.
Where a business starts during an income year, the total value of stock on hand at the end of that year is included in assessable income.
Using stock for their own purposes If a business owner takes an item of trading stock for their private use, they need to:
account for it as if it had been sold
include the value of the item in assessable income.
There are alternate ways this stock can be valued. The business can:
keep records of the actual value of goods taken from trading stock for private use and report that amount
use the amounts the ATO provides as estimates of the value of goods taken (updated annually).
If the enterprise is a primary producer and they slaughter livestock for their own consumption, it must be accounted for it as though it was disposed of it at cost.
This article is intended to be a guide only. None of the comments contained in the article are intended to be advice, whether legal, financial or professional. You should not act solely on the basis of the information contained in this article because many aspects of the material have been generalised and the tax laws apply differently to different people in different circumstances. Further, as tax and related laws change frequently, there may have been changes to the law since this article was published. Specific advice should always be obtained from a tax professional.
