An example – trading stock valuations

Trading stock:

• Is an asset that is recorded on your balance sheet
• Should be tax neutral to you (in most cases)
• Is expensed in your profit and loss, offset by the value of the stock asset, until you sell it.
• Impacts your cash position, because you have your funds tied up in it until sold, but no direct impact on your profits or taxable income until you sell that stock.

How can you get a tax saving?

If at 30 June some of your stock is worth less than its cost price, you have the option to value it at the lower figure and take the tax write off now, rather than wait until the stock is sold. This reduction in your stock value will produce a tax saving for you.

Valuing Stock – which method to use

The method to apply depends on the stock and your circumstances. The different ways of valuing stock can produce different results. The options are:

• At cost (most common)
• Market selling price, or
• Replacement value.

Obsolete Stock?

If you have stock that is about to become obsolete, valuing it at cost price for tax purposes may not be most tax effective – maybe value the stock at market selling price, would give you a better outcome, particularly if it is a large quantity.

The tax rules also allow you to use a value that is lower than cost, market selling price or replacement value if this is warranted because of obsolescence or other special circumstances as long as the value you elect is reasonable. Take the example of vitamins with a use by date that only has a month or two left on it. Leading up to and once the vitamins reach their use by date they are unsaleable. In this case, you would estimate how much of the stock you are likely to sell prior to the use by date and at what price. Using previous sales as a guide, if you only expect to sell 15% of the stock prior to the use by date, you would use the market value of this 15%. Other than when you sell your stock, your tax return gives you a once a year opportunity to adjust your stock values and realise any losses.

Other examples – R&D Tax incentive, and Export Market Development Grant

Another way business’ disadvantage themselves is not taking the Government concessions available to them. The R&D tax incentive and the Export Market Development Grant are a classic case.

R&D incentives:

If you develop new technologies or products, you might be eligible for a 43.5% tax offset (if your business has a turnover under $20 million).

Export Market Development Grant:

Reimburses up to 50% of eligible export promotion expenses above $5,000, provided that the total expenses are at least $15,000.