How is trading stock valued for tax purposes in Australia — cost price vs market value?

Trading stock refers to anything your business buys, produces, or manufactures with the intention of selling. For tax purposes, you must include the value of your trading stock in your assessable income calculations at the end of each financial year.

Year-end stock valuation: At 30 June each year, you must value your closing trading stock. Australian tax law allows you to value each item of stock using one of three methods — you can choose a different method for each item:

• Cost price: The actual cost to acquire or produce the stock item, including freight, handling, and other incidental costs. This is the most straightforward method.
• Market selling value: The current price at which you would normally sell the item in the ordinary course of your business.
• Replacement value: The current cost to replace the item with an identical or similar item.

When would you choose market value or replacement value? If your stock has decreased in value (e.g. obsolete items, damaged goods, or stock that has fallen in price), choosing market selling value or replacement value over cost price reduces your closing stock value and therefore your taxable income for the year.

Opening and closing stock: The difference between opening stock and closing stock affects your taxable income. If closing stock exceeds opening stock, the difference is added to assessable income. If closing stock is less, the difference is a deduction.

Small business simplification: Small businesses (turnover under A$10 million) do not need to do a stocktake if the estimated value of their stock is A$5,000 or less — they can use the opening value as the closing value.