Trading stock is anything your business acquires, produces or manufactures, for the purpose of manufacturing, selling or exchanging. Livestock is also trading stock.
Trading stock does not include:
standing or growing crops, timber or fruit – these only become trading stock when they are harvested, felled or picked
stocks of spare parts held for repairs or maintenance to plant and equipment
goods owned by a lending business where the goods are used to earn income by hire or rental, rather than manufacture, sale or exchange, for example furniture, DVDs, catering equipment, tools, vehicles etc.
consumables used in manufacturing trading stock, such as cleaning agents or sandpaper.
All businesses must account for the value of their trading stock at the end of each income year (closing stock) and at the start of the next income year (opening stock).
An increase in your trading stock’s value over the year is counted as assessable income, while a decrease is considered an allowable deduction.
Conducting a stocktake usually involves physically counting your stock and valuing each item, using one of three methods:
The cost price method includes all costs associated with bringing the stock to its current condition and location. This may include the cost price plus freight, insurance, customs and excise duties, and delivery charges.
The market selling value method uses the current value of stock if it is sold in the normal course of business.
The replacement value method uses the cost to obtain an almost identical item that is available in the market on the last day of the income year.
You can choose a different method each year for different items of stock.
The closing value for an item of trading stock at the end of one income year automatically becomes its opening value at the beginning of the next income year.
If you are entitled to GST credits you generally exclude the GST component when calculating your trading stock’s value.
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.
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.
If the difference in your trading stock’s value during the year varied by more than $5,000, use the general trading stock rules.
Find out more on the ATO website >>