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Does your business deal in trading stock?

Posted 3 Mar '21

Does your business deal in trading stock?

By Gillian Hayward

Does your business deal in trading stock? Do you know your requirements when preparing your annual stocktake?

Trading stock is anything your business acquires, produces or manufactures, for the purpose of manufacturing, selling or exchanging. Livestock is also trading stock. 

If your business deals in trading stock you need to value it at the end of the financial year.

Depending on your circumstances you have the following methods to value your trading stock:

  • Under the simplified trading stock rules: You must be a small business with turnover of less than $10m and estimate that the value of your trading stock has not changed more than $5,000. Under this method no formal stocktake is required and you do not have to account for the changes in your trading stock value. A reasonable estimate of your stock value is accepted by the ATO as long as you can support your conclusion.
  • Under the general trading stock rules: If your trading stock changes by more than $5,000 in a year, you must do an end of year stocktake and record the value of all trading stock you have on hand.

You need to keep records showing the following information:

  • a list describing each article of stock on hand and its value
  • who did the stocktake
  • how and when it was done
  • who valued the stock and the basis of the valuation

Under either method the value of your stock can be at:

  • Cost price method – which is the cost price plus freight, insurance, duties and delivery charges.
  • Market selling value method – current value of stock if it is sold in the ordinary course of business.
  • Replacement value method – uses the cost to obtain an almost identical items that is available in the market on the last day of the income year.

These records need to be kept for five years from the lodgement date of your tax return. Further information can be accessed here https://www.ato.gov.au/Business/Income-and-deductions-for-business/Accounting-for-trading-stock/

Gillian Hayward

Associate




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