Understanding the tax rules for trading stock – Part 2

Do you operate a business that involves making and/or selling goods? If so, do you know whether or not you have to conduct a stocktake at the end of the year?

The short answer is yes: you do have to conduct a stocktake on all of your trading stock.

As I discussed on Wednesday, the value of your trading stock is taken into account in working out your taxable income, with the difference between the opening and closing amounts being counted either as income or a deduction (depending on which value is higher).

In the majority of instances, the only way to work this out at the end of the income year is by conducting a stocktake, then using one of the three methods I previously outlined to calculate the value of those goods for tax purposes.

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Simply estimating the value of your trading stock is not sufficient for ATO requirements.

The ATO also states that the stocktake should be undertaken as close to the end of the year as possible.

There is one concession, however.

If you run a small business, and you estimate the difference between the opening and closing amounts of your trading stock to be $5,000 or less, you can choose not to take the difference in value into account.

Of course, if the value of your closing stock is lower than your opening stock and you want to claim the deduction, you can still choose to use the general trading stock rules even if you are a small business entity. However, you would then need to conduct a stocktake in order to claim the deduction.

Remember also that there are special categories of trading stock that are treated differently to normal trading stock, so be sure to check Chapter T4 Trading Stock of your Smart Tax Handbook for further information. And if you’re not yet a subscriber, make sure you click here to find out more.

Tags: Trading Stock