Small businesses can choose not to conduct a formal stocktake at the end of their income year if the estimated value of their trading stock has not changed by more than $5,000. This rule, known as “simplified trading stock rules,” commonly gets overlooked, especially by new businesses. If this choice is selected, the ATO says the business is not required to account for the incremental changes in their stock’s value. However, in order for the ATO to find the business’s estimate reasonable, the following requirements must be met:
- The business must sustain a consistent level of stock yearly and have a reasonable estimate of the value of the available stock
- Even though stock levels vary, the business can make an estimate of the stock based on the records of stocks previously purchased
A small business is required to conform to general trading stock guidelines if their stock value has varied by more than $5,000. Further details on those rules are outlined below, but if additional guidance is needed it is advisable to seek the assistance of a tax or accounting professional.
Another tip for those unfamiliar with business taxes – rise in trading stock value over the fiscal year is considered income, while a decline in value is an acceptable deduction. Once again, feel free to ask for assistance.
General Trading Stock Rules:
A business is qualified to use the general stock rules if the trading stock’s worth changes by the following:
- An increase of more than $5,000
- A decrease of $5,000 or less (if a business owner chooses to do a stocktake and account for the change in value instead of simply using the general rules).
Note: Even if a business is eligible to use the simplified trading stock rules, it can still choose to a stocktake instead and abide by the general stock rules.
If a business chooses to use the general stock rules, they are required to do an end-of-year stocktake to record the value of all trading stock available at both:
- the beginning of the fiscal year
- the end of the fiscal year
It is very common for the value of a stock to remain relatively the same at the beginning of the fiscal year and the start of the following one.
However, if for some reason the value of the closing stock is different than the opening one, the business must include the difference between the two as part of its taxable income – whether it was an increase or decrease in value.
If a new business is formed during an income year, the value of the available stock at the end of the year is considered taxable income.
Personal Use of Stock:
If a business owner takes an item of trading stock for personal use, they need to:
- Record the stock as if it had been sold and
- Include the worth of the item as assessable income.
There are few different ways this stock can be valued. The business can:
- Document and report the actual cash value of the items taken for personal use from trading stock or
- Choose to use the ATO estimates of the value of goods taken. (Note: This list is updated annually, so please ask for this if applicable.)
Where a company’s main business is the primary production or the slaughter of livestock for personal use, the stock must be accounted for as if were disposed of at cost.