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  • Simplified trading stock rules

    Eligible small businesses can use these simplified rules if there is a difference of $5,000 or less between:

    • the value of your stock on hand at the start of the income year
    • a reasonable estimate of the value of your stock on hand at the end of that year.

    The $5,000 threshold applies to both increases and decreases in the value of your trading stock.

    Under these simplified rules you:

    • do not have to do a stocktake at the end of the income year
    • do not have to account for any changes in the value of your trading stock.

    If the difference is more than $5,000, you need to use the general trading stock rules and conduct a stocktake and account for changes in the value of your trading stock at the end of the income year.

    On this page:

    See also:

    Opening value of stock

    The value of your stock on hand at the start of the income year is the same as the amount you included in your return at the end of the previous year.

    If you did not have any trading stock in the previous year, the value of trading stock at the start of the year is zero. This might occur if you have just opened a new business or if this is the first year you have trading stock.

    If the value of trading stock varies by $5,000 or less and you choose not to account for the difference, the value of your trading stock on hand at the end of the year is deemed to be the same as it was at the start of the year.

    Estimating stock value

    You must make a reasonable estimate of both the quantity of stock on hand and the value of each item of stock.

    In general, for your estimate to be reasonable, you must:

    • take into account all relevant factors and considerations likely to affect the amount and value of your trading stock on hand
    • undertake your estimate in good faith
    • follow a rational and reasoned process
    • be able to explain and verify your process to a third party.

    When you make an estimate you must consider the following factors:

    • the type of trading stock you hold (for example, a large range but few items or a small range of many items)
    • where and how your stock is stored (for example, one location or several locations)
    • how you value items of stock (cost price, market selling value or replacement value method)
    • the quantity and value of your stock on hand in previous income years
    • whether the value of your stock varies from previous income years or during the income year
    • how you record your sales and purchases and how accurate your records are
    • your inventory systems and how accurate they are
    • information from any stocktakes you have undertaken
    • significant changes to the type and quantity of stock you hold.

    Stock you haven't paid for

    A reasonable estimate must take into account the value of all trading stock on hand, including stock you have not yet paid for.

    However, you still claim a deduction for trading stock in the same way you claim your other expenses. If you are claiming your deductions for other expenses when you pay them (rather than when the expense is incurred) you cannot claim a deduction for the cost of your trading stock until you have paid for it.

    Example: Trading stock estimate

    Colin is an electrician. Mostly he does small repair and installation jobs that he needs fairly standard stock items for. He always has a small number of these items in his van and workshop. At year end in past income years, he has valued this stock at between $5,000 and $7,000. At the end of the previous income year he valued his stock at $6,800.

    Colin's business has not changed during the current income year. He estimates that the quantity of stock he holds at the end of the current income year is similar to the amount he held in previous income years. However, he knows that the cost of most items has risen by an average 15% during the current income year. On this basis, he increases the value of stock on hand at the end of last income year by 15% to arrive at a reasonable estimate of $8,000.

    As the difference between his opening stock value ($6,800) and his reasonable estimate of closing stock ($8,000) is not more than $5,000, Colin does not need to do a stocktake or account for the change in the value of trading stock when working out his assessable income.

    End of example

    Choosing to do a stocktake

    You can choose to do a stocktake and include the change in value in your assessable income, even if that change is $5,000 or less. You might make this choice if you prefer to:

    • increase your assessable income in small increments over a number of years (assuming the value of your stock is increasing) rather than making one large adjustment when the increase in stock value reaches the $5,000 threshold
    • reduce your assessable income immediately (assuming the value of your stock has decreased).

    Where you choose to account for the change in value, the general trading stock rules apply.

    Example: choosing to do a stocktake

    Poppy runs a leather goods store. Her stock on hand at 1 July 2017 is $6,600 and she reasonably estimates the value at 30 June 2018 to be $7,800.

    As the difference is not more than $5,000, she does not need to do a stocktake or account for the change in the value of her trading stock when she works out her assessable income.

    Poppy chooses to account for the change in value of her trading stock. She must do a stocktake and value each item of her trading stock on hand at 30 June 2018 at its cost price, market selling value or replacement value.

    She chooses to value each item at cost and values her closing stock at $7,780.

    Because she has chosen to account for the change in value, the difference of $1,180 ($7,780 − $6,600) is included in Poppy's assessable income for the 2017-18 income year.

    End of example
      Last modified: 25 Jun 2018QC 21101