Your small business clients can use simpler trading stock rules. If your client operates a small business entity and at the end of the income year estimates that their trading stock’s value has not changed by more than $5,000, it may pay to remind them (especially if they are new to business) that they can choose not to conduct a formal stocktake — they will therefore not be required to account for the changes in the trading stock’s value.
The estimate for this purpose (an election to use the “simplified trading stock rules”) will be deemed to be reasonable by the ATO if either:
- they maintain a constant level of stock each year and have a reasonable idea of the value of stock on hand
- stock levels fluctuate, but they can make an estimate based on records of the stock purchased.
A small business will need to use the general trading stock rules (more below) if the difference in trading stock value has varied by more than $5,000.
And another reminder for your business clients if they are new to the game — an increase in trading stock value over the year is assessable income, while a decrease is an allowable deduction.
The general rules
The general trading stock rules apply if the value of trading stock changes by:
- more than $5,000
- $5,000 or less if a business owner chooses to do a stocktake and account for the change in value.
A business can choose to do a stocktake and use the general trading stock rules even if they are eligible to use the simplified trading stock rules.
Using the general trading stock rules, they must do an end-of-year stocktake and record the value of all trading stock they have on hand at both:
- the beginning of the income year
- the end of the income year.
The value of stock at the end of an income year is usually the same as its value at the start of the next income year. However:
- if for some reason the value of closing stock is more than that of opening stock, the business must include the difference as part of their assessable income
- if the value of closing stock is less than that of opening stock, it can reduce assessable income by the difference.
Where a business starts during an income year, the total value of stock on hand at the end of that year is included in assessable income.
Using stock for their own purposes
If a business owner takes an item of trading stock for their private use, they need to:
- account for it as if it had been sold
- include the value of the item in assessable income.
There are alternate ways this stock can be valued. The business can:
- keep records of the actual value of goods taken from trading stock for private use and report that amount
- use the amounts the ATO provides as estimates of the value of goods taken (updated annually).
If the enterprise is a primary producer and they slaughter livestock for their own consumption, it must be accounted for it as though it was disposed of it at cost.
Your small business clients can use simpler trading stock rules Your small business clients can use simpler trading stock rules Your small business clients can use simpler trading stock rules Your small business clients can use simpler trading stock rules