1. Prepare Tax Documentation for Individuals
Chapter 8
Trading Stock
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2. © 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.”
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3. © 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.
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4. © 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
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5. © 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.
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6. Obsolete Trading Stock
Under s 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.
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7. 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 applies. S 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.
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8. 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).
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9. 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).
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10. 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.
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11. 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.
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12. 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.
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