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Simplified trading stock rules

Businesses may be able to use the simplified trading stock rules.

Last updated 6 June 2021

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
    • 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 
  • you estimate that the value of your trading stock changed by less than $5,000 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.
Start of example

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.
End of example

Estimating stock value

You must make a reasonable estimate of both the:

  • quantity of stock on hand (including stock you haven't yet paid for)
  • value of each item of stock.

We will consider your estimate to be reasonable if you either:

  • maintain a constant level of stock each year and have a reasonable idea of the value of your stock on hand
  • can estimate the stock you have purchased, based on your records.

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; 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.  

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.

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.