If you are a small business entity and are choosing to use the simplified trading stock rules you need to account for changes in the value of your trading stock only if there is a difference of more than $5,000 between the value of all your stock on hand at the start of the income year and a reasonable estimate of the value of all your stock on hand at the end of the income year.
The value of your stock on hand at the start of the income year is the same value as the closing value shown on your schedule in the previous year. This may not necessarily reflect the actual value of your stock if you did not account for the change in value of your stock in the previous year. For more information on a reasonable estimate of the value of stock, see ato.gov.au or phone 13 28 66.
You can still choose to conduct a stocktake and account for changes in the value of trading stock, if you wish.
Is the difference between the value of your opening stock and a reasonable estimate of your closing stock more than $5,000?
Yes – You must account for changes in the value of your trading stock. Go to Step 2.
No – If you choose not to account for changes in the value of your trading stock, go to Step 1. Otherwise, go to Step 2.
- If the difference referred to above is $5,000 or less and you choose not to account for this difference, the closing stock values you enter must be the same as the values you enter at Opening stock. Do not enter your reasonable estimate.
If this is your first year in business, the value of your Closing stock will be zero.
Go to Cost of sales.
- If the difference referred to above is more than $5,000 or you choose to account for the difference in trading stock, the Closing stock values must be brought to account under section 70-35 of the ITAA 1997. For more information, see Other businesses below.
You must include in your Closing stock amount the value of all stock on hand, regardless of whether you have paid for the stock.
The amount that is shown at Closing stock is the total of the value of all items of trading stock, with the value of each item calculated for tax purposes in accordance with section 70-45 of the ITAA 1997.
Trading stock is anything you have on hand which you produced, manufactured, acquired or purchased for the purpose of sale, manufacture or exchange. For example, trading stock includes livestock but not working animals (except those used by a primary producer), crops and timber when harvested, and wool after it is removed from the sheep.
Manufacturers must include as trading stock partly manufactured goods and materials on hand. However, closing stock excludes any amount that represented closing stock of a business that ceased operations during the year. This amount is included at Other business income. For more details about what constitutes trading stock, see Simplified trading stock rules or phone 13 28 66.
You can choose one of the following three methods to value your trading stock:
- market selling value
- replacement value.
You may elect to value an item of trading stock below the lowest value calculated by any of these methods because of obsolescence or other special circumstances. The value you elect must be reasonable. Where you elect to value an item of trading stock below cost, market selling value and replacement value, you must complete the Trading stock election.
You may use different methods to calculate each item of trading stock in different years or for different items in the same year. However, the opening value of each item in a particular year must be the same as the closing value for that item in the previous year.
If you are registered for GST, the value of closing stock should not include an amount equal to the input tax credit that would arise if you had acquired the item solely for business purposes at the end of the income year. Input tax credits do not arise for some items of trading stock, such as shares.
If you are a primary producer, you must add the value of your closing stock from your livestock account at PP3 on your primary production worksheet to the value of your closing stock from your produce account at PP8 on your primary production worksheet.
The total of these amounts is the total value of your primary production closing stock.
As the tax values of closing stock on hand are shown at PP3 and at PP8 on your primary production worksheet, you cannot reduce these values by accounting entries. Keep records showing how each item was valued.