Trading Stock Elections for Business Tax Returns

A trading stock election records the tax value you choose for your client’s stock. Establish what is on hand, support the valuation and test the simplified-stock concession before reconciling the result to accounting profit.

Establish the Stock on Hand

Start with the stock your client holds for manufacture, sale or exchange in the ordinary course of business. Keep equipment used to run the business outside the ordinary stock list. A retailer’s goods for sale and its shop fittings need separate treatment.

Collect the previous return’s closing tax stock figure before you calculate this year’s movement. Under Division 70’s trading-stock rules, that figure carries into opening tax stock. It can differ from opening accounting stock.

Use these checks to establish the quantity file before choosing values.

1. Obtain the stocktake sheets or inventory report. Record who prepared it, when the quantities were measured and which locations it covers.
2. Reconcile movements between the count and year end. Trace purchases, sales, returns and transfers to supporting records so the same units are not counted twice.
3. Ask about goods held elsewhere or on consignment. Read the arrangements to establish whose stock is on hand, including goods another business holds for your client.
4. Separate work in progress by activity. Manufacturing materials and partly completed goods need a different enquiry from unbilled professional services. Establish the applicable treatment before including either in stock.

If a count is missing, investigate the inventory records and later counts, then reconstruct quantities through documented movements. An unexplained accounting balance gives you neither a quantity check nor a reasonable estimate for the concession.

If the client transferred stock between entities, assess the small business restructure rollover separately. A year-end valuation choice does not settle the transfer’s tax treatment.

Choose the Supported Valuation Method

For ordinary trading stock, select cost, market selling value or replacement value for each item. Special rules can change that choice for particular stock. Keep the tax election separate from the valuation used in the accounts.

The ATO’s valuation guidance explains the basis of each method. Cost includes the costs of bringing stock to its condition and location. Market selling value uses an ordinary business sale. Replacement value concerns an almost identical item available at year end.

Fictional Item-Level Valuation

Assume a fictional retailer holds only the two product lines below. The quantities are confirmed, the alternative values are supported and every amount excludes recoverable GST. Each row applies the stated unit values to identical units.

The preparer chooses a supported replacement value for the standard line and supported ordinary selling prices for the discontinued line. Closing tax stock is $3,800 + $1,000 = $4,800. The cost total is $4,000 + $1,500 = $5,500.

Attach supplier quotes to the replacement calculation and sales evidence to the selling-value calculation. Check that each record concerns the same product, condition and year-end market. Explain a change from the previous method, while recognising that the election can differ between items and years.

Do not automatically copy an accounting net realisable value. Trace any selling-cost deduction or provision to the tax method being claimed. Retain the GST treatment with the calculation so the reviewer can compare like amounts.

Check the Simplified Stock Election

Eligible businesses can choose to disregard a stock movement of $5,000 or less, measured against a reasonable closing estimate. The test covers increases and decreases across all trading stock.

Confirm eligibility under Subdivision 328-E. It covers small business entities and extends the relevant turnover test to $50 million for qualifying medium businesses. Apply the aggregated-turnover rules, including relevant connected entities and affiliates, rather than checking sales of this entity alone.

For the fictional retailer, assume opening tax stock is $4,000 and the reasonable closing estimate is $4,800. The increase is $800. If eligible, the retailer can choose closing tax stock of $4,000 under the concession. Keep the $4,800 estimate as evidence of eligibility.

If the retailer instead chooses to account for the change, it must stocktake and bring the full movement to account. If the estimated movement exceeds $5,000, the concession is unavailable. The threshold is not an amount you subtract from a larger movement.

Incorrect: An eligible business estimates an $800 increase and enters the estimate as closing tax stock while claiming to disregard the movement.

Correct: The choice leaves tax stock at its opening amount. Retain the $4,800 estimate separately with the election.

Reapply the test each year. Keep a reasonable estimate even where the choice removes the need for a formal year-end stocktake.

Keep the Election and Reconcile the Return

Prepare a workpaper that connects the stock evidence to the tax return. Record the client entity and income year, then identify the selected method or simplified-stock choice. Attach the eligibility calculation when using the concession.

Fictional Tax Reconciliation Workpaper

Continue the retailer example. Assume opening accounting stock also equals $4,000, closing accounting stock remains at cost and accounting profit already includes its stock movement. Purchases and all other tax adjustments are unchanged.

The general-rules adjustment is the tax movement of $800 less the accounting movement of $1,500: a $700 deduction. Under the simplified choice, reverse the $1,500 accounting movement. These alternatives describe different choices for the same assumed facts.

Where opening book and tax values differ, compare both movements. Using only the closing difference would miss the opening adjustment. Check the return calculation for an existing stock adjustment before adding another.

For obsolete or damaged stock, retain photographs, age reports and evidence of saleability. Section 70-50 permits a reasonable value below the ordinary alternatives where obsolescence or special circumstances warrant it. A blanket provision for slow stock needs item-level support before you use it for tax.

Keep the preparer’s conclusion and reviewer approval with the quantities, valuation evidence and reconciliation. The ATO’s stock-record guidance generally requires five years’ retention and explains when a longer review period matters.

Before completing the company tax compliance review, tie opening tax stock to the previous return and closing tax stock to the chosen treatment. For this example, confirm either $4,800 closing tax stock with a $700 deduction or $4,000 with a $1,500 deduction. Record the chosen closing tax balance for next year’s opening workpaper.