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Valuing trading stock

ABA Tech Talk

With EOFY fast approaching, some of your clients may be compelled to undertake a stocktake. The general trading stock rules apply if the difference in the trading stock’s value has varied by more than $5,000 from the prior year which means a Stock Take is ESSENTIAL.

There are two sets of rules to consider when valuing trading stock:

  • Simpler trading stock rules for small businesses
  • General trading stock rules

The ATO offer three convenient methods to value trading stock:

  • 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.

TIP:

  1. Gone are the days of FIFO, LIFO and WAC.
  2. An increase in the trading stock’s value over the year is assessable income, while a decrease is an allowable deduction.
  3. If at the end of the year, the a small business estimate’s that the trading stock’s value has not changed by more than $5,000, a formal stocktake is not required, and they don’t need to account for the changes in the trading stock’s value.
  4. 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.
  5. A different method can be used each year for different items of stock.
  6. If a business owner takes stock for personal use, they have 2 options to account for it:
    1. Treat the transaction as if they had sold it and include the value of the item in their assessable income OR
    2. Keep records of the actual value of goods taken from trading stock for private use and report that amount, or use the amounts the ATO estimate of the value of goods taken which is updated annually.

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Category
ABA
Published
04 Jun 2019
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