Prepare Tax Documentation for Individuals Chapter 8 Trading Stock © National Core Accounting Publications

© National Core Accounting Publications Overview Definition of trading stock Trading stock is “anything produced, manufactured, acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of business, including livestock.” © National Core Accounting Publications

© National Core Accounting Publications Overview Taxation of trading stock Trading stock is required to be taken into account in determining assessable income. For tax purposes, trading stock is brought to account in the same way as in the normal accounting calculation of gross profit. © National Core Accounting Publications

© National Core Accounting Publications Methods of Valuation Trading stock may be valued by its: Cost Price Cost of purchase and costs of delivery and preparation Market Selling Value Normally expected sales value Replacement Value Cost of identical replacement stock at the end of the income year © National Core Accounting Publications

© National Core Accounting Publications Cost Price Any of the following methods are acceptable as a basis for valuation under the Cost Price method: Average cost FIFO Standard cost LIFO is not an acceptable valuation method. © National Core Accounting Publications

Obsolete Trading Stock Under s.70-50 where the value of trading stock is less than its cost price, market selling value or replacement value due to obsolescence or any special circumstance (e.g. discontinuation of a product line), the taxpayer may determine a lower fair and reasonable trading stock value. © National Core Accounting Publications

Disposals Outside Normal Trading If the stock is given away or disposed of in a way that is not part of the ordinary course of carrying on a business, s.70-90 applies. S.70-90 states that where a taxpayer disposes of an item of trading stock outside the ordinary course of business, their assessable income includes the market value of that item on the day of disposal. © National Core Accounting Publications

Composition of Trading Stock Consumables Materials and stores used and consumed in making trading stock are not trading stock. Spare parts Spare parts held for repair and maintenance purposes are also not trading stock. Both are normally deductible under s.8-1(1). © National Core Accounting Publications

Accounting for Trading Stock General trading stock rules The general trading stock rules apply where the value of trading stock changes by: more than $5,000; or, $5,000 or less but the taxpayer chooses to do a stocktake and account for the change in value.   Using the general trading stock rules, the taxpayer must record the value of all trading stock on hand at both of the following: beginning of the income year (generally 1 July). end of the income year (generally 30 June). © National Core Accounting Publications

Accounting for Trading Stock Small Business Entity concessions Upon satisfying the small business entity test, a taxpayer can choose to use the simplified trading stock rules.  Where the difference in opening and closing balances of trading stock is $5,000 or less, a small business entity can choose not to: account for the change in value of trading stock. value each item of trading stock on hand at the end of the year of income. © National Core Accounting Publications

Drawings of Trading Stock Drawings of trading stock by the business owner for personal use, consumption or enjoyment form part of that taxpayer’s assessable income. The ATO prescribes standard values for goods taken from trading stock for private use for many businesses. © National Core Accounting Publications

Standard Values Standard values for the 2015* income year were: Type of Business   Amount (excluding GST) for each adult/child over 16 years $ Amount (excluding GST) for child 4 to 16 years Bakery 1,330 665 Butcher 790 395 Caterer 3,740 1,870 Delicatessen 3,460 1,730 Fruiterer/Greengrocer 780 390 Restaurant/café (licensed) 4,490 Restaurant/café (unlicensed) Takeaway food shop 3,350 1,675 Mixed Business (e.g. milk bar/convenience store or general store) 4,170 2,085 * 2016 standard values not yet released by the ATO. © National Core Accounting Publications