When you can use these rules
You can use the simplified trading stock rules if:
- either
- you are a small business with an aggregated turnover of less than $10 million a year or
- you would be a small business except your aggregated turnover is $10 million or more but less than $50 million – for income years starting on or after 1 July 2021, and
- you estimate that the value of your trading stock changed by $5,000 or less in the year.
If you use the simplified rules, you don't have to:
- conduct a formal stocktake
- account for the changes in your trading stock’s value.
Estimating stock value
Your estimate will be considered reasonable if either:
- you maintain a constant level of stock each year and have a reasonable idea of the value of your stock on hand
- your stock levels fluctuate but you can make an estimate, based on your records, of the stock you have purchased.
You must:
- undertake your estimate in good faith following a rational process
- be able to explain and prove your process to us if requested.
In making your estimate consider:
- 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 stock items (for example, 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 those 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.
You still claim a deduction for trading stock in the same way you claim your other expenses. If you are claiming your deductions for your other expenses when you pay for them – rather than when the expense is incurred – you must do the same for your trading stock claims.
Example: Trading stock estimate
Colin is an electrician. He always has a small number of items in his van and workshop that are trading stock. At the end of the previous income year he valued his trading stock at $6,800.
Colin's business hasn't changed during this income year. He estimates that the quantity of trading stock he holds at the start and end of the year is similar. However, he knows that the cost of most items has increased by around 15% during the year.
He multiplies the value at the start of the year ($6,800) by 1.15, which gives an end of year estimate of $7,820.
The difference between the value of the opening trading stock ($6,800) and the closing trading stock ($7,820) is less than $5,000. This means Colin doesn't need to:
- do a stocktake
- account for the change in his trading stock value when working out his assessable income.
Opening value of stock
The value of your stock on hand at the start of the income year is the same as the value you included in your return at the end of the previous year.
If you didn't have any trading stock in the previous year, the value of your stock on hand at the start of the year is zero ($0). This is likely if you:
- started a new business in the year
- have an existing business but this is the first year you have trading stock.
If you choose not to account for the change in the value of your trading stock (under the simplified trading stock rules), the value at the end of the year is considered to be the same as it was at the start of the year.
Change in value of stock
If the difference in your trading stock’s value during the year varied by more than $5,000, use the general trading stock rules.
Under the general trading stock rules, an increase in your trading stock’s value over the year is assessable income, while a decrease is an allowable deduction.
There are other rules for when you use trading stock for private purposes.
Example: value of trading stock changes
Joel runs a knitwear store and the value of his opening stock for 2023–24 is recorded as $5,600.
If Joel makes a reasonable estimate that the value of his closing stock at the end of 2023–24 is:
- $8,000 – as the difference is no more than $5,000, he doesn't need to do a stocktake or include the increase in value of his stock in his assessable income
- $12,000 – as the difference between the opening stock ($5,600) and his reasonable estimate of the closing stock ($12,000) is greater than $5,000, Joel must do a stocktake and include the increase in value of his stock in his assessable income for 2023–24.
Choosing to do a stocktake
You can choose to do a stocktake. You might make this choice if the:
- value of your stock is increasing and you prefer to increase your assessable income in small increments over a number of years. The alternative would be to make one large adjustment when the increase in stock value reaches the $5,000 threshold.
- value of your stock has decreased and you prefer to reduce your assessable income immediately.
If you choose to do a stocktake:
- apply the general trading stock rules
- include the change in value of trading stock in your assessable income, even if the change is $5,000 or less.