The Ins and Outs of trading stock

What is trading stock?
Trading stock includes anything you produce, manufacture, acquire or purchase for manufacture, sale or exchange.

What isn’t considered to be trading stock?
Stocks of spare parts held for repairs and maintenance, goods acquired to be hired out to customers and consumables used in manufacturing trading stock such as cleaning agents.

Standing or growing crops, timber or fruit are not considered to be trading stock either. They become trading stock when they are harvested, felled or picked.

How do I value my trading stock?
There are several ways that you can value your trading stock.

The most commonly used method is cost. This means that the stock is valued at the price paid . The cost of the trading stock also includes expenses incurred getting the stock to its existing condition such as freight, handling charges and cost of labour.

Using the market selling value is another method. This is the value from a sale or sales in the ordinary course of the taxpayers business. For a retailer, it would be the current retail value. For a wholesaler, it would be the current wholesale value.

The replacement value method is another way you can value your trading stock. This is the price at which trading stock can be replaced by the taxpayer buying a comparable item in the market. To use the replacement value method, the items must be available in the market and be substantially identical to the replaced items.

What happens if my stock becomes obsolete?           
If your stock becomes obsolete, you can elect to write down the stock to a lower value, providing it is still reasonable.

For stock to be considered obsolete it must be out of use, out of date, unfashionable or outmoded. You must be able to show that there is no reasonable prospect of future sales of the stock.

You can decide to either make a once-off write-down or a progressive write-down of the value of the obsolete stock, although a progressive write-down is more commonly used and preferred. Obsolete stock which remains on hand should generally by valued at its scrap value.

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Implication of receiving shares under an Employee Share Scheme

Employee share schemes (also known as employee share purchase plans or employee equity schemes) give employees shares in the company they work for, or the opportunity to buy to shares in the company. Companies encourage employees to participate in employee shares schemes by offering them discounted shares or rights to acquire shares. The amount of the discount is treated as assessable income for tax purposes.

The discount you receive is worked out as the market value of the shares or rights less any money or other consideration you provided to acquire them. It is calculated at the date you acquired the shares or rights.

The key tax issues to be aware of are:

• You generally need to include the amount of the discount in your assessable income for the income year you acquire or receive the shares or rights (in some circumstances you can defer this until a later income year);
• Capital gains tax may apply when you dispose of the shares or rights. If you held the shares or rights for longer than 12 months you may be able to access the 50% general discount.

What can you expect from your employer?

Your employer will tell you if you are eligible to participate in an employee share scheme. They will also tell you whether the scheme meets the criteria for taxed-upfront scheme or tax-deferred scheme.

Your employer will give you an Employee Share Scheme Statement at the end of the financial year. The statement will detail all the shares or rights you acquired throughout the financial year. You will need to provide this statement to your accountant to assist in the preparation of your taxation return.

The government is currently reviewing the legislation on employee share schemes. There is speculation that they are close to finalising new legislation which aims to reduce the tax burden that employees are currently experiencing with the upfront taxing method.

We recommend contacting our office if you would like to discuss your specific circumstances or the new legislative changes.

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