Small Business Entity Tax Concessions
Simplified stock trading rules for small business
Small businesses are able to use a simplified set of trading stock rules as an alternative to those that apply to larger businesses.
If you choose to apply the simplified rules to your small business, you will only need to perform a stocktake, or account for any changes in the value of your stock under certain circumstances.
What is trading stock?
Trading stock can be anything which your business purchases, produces, acquires, or manufactures for the purpose of sale or exchange with customers. Livestock are included in this definition, but not beasts of burden or work animals used in a non-primary production setting.
The following are examples of things NOT included in the ATO’s definition of trading stock:
• DVDs owned by a DVD rental business that are used to earn income by rental or hire, rather than sale, manufacture, or exchange
• Supplies of spare parts being stored for maintenance or repairs of plant and equipment
• Consumable items used in the manufacture of trading stock, such as sandpaper and cleaning agents
• Timber, fruit, and standing or growing crops – only the harvested, picked, or felled form of these count as trading stock.
Valuation of trading stock
You are generally required to perform a stocktake to determine the value of any trading stock you have on hand at the end of the income year. This involves sorting through each physical item of stock and assigning a value to each of these items.
When assigning a value to items of stock, you can use one of these three methods to determine a value:
– Market selling value: Under this method, you are not allowed to use a reduced valuation if you are forced to sell stock. Market selling value means the current value of your stock as it would sell in the normal operation of your business.
– Cost price: A cost price is the monetary value of everything involved with bringing a stock item into existence. This can include customs duties, freight, materials and labour involved in manufacturing, and purchase price.
– Replacement value: This is the price of a similar item that you could reasonable use to replace your trading stock in the buying market on the last day of an income year.
You are able to change which method you use for performing stock valuation year to year, and you can even use different valuation methods for different stock items. The value of stock on hand at the beginning of the next income year must be equal to the value of stock on hand at the end of the last income year.
If you have applied the simplified stock trading rules to your business, you may be able to estimate the value of your stock rather than physically counting each item and performing a manual valuation.
You can use an estimate so long as there is a difference of $5000 or less between the actual value of your trading stock at the beginning of the income year and your reasonable estimate of the value of stock on hand at the end of the income year.
Under the simplified rules, you are required to either value your stock, or estimate the value of your stock each year, but you do not need to notify the ATO.
If you are entitled to a GST credit, you are not required to include GST in the value of your stock.
Immediate deductions for prepaid expenses
As a small business entity, you are able to claim immediate deductions on prepaid expenses so long as the payment involved covers a period of 12 months or less ending in the next income year.
There are a set of prepayment rules which determine how much you are able to claim as prepaid expenses in each income year. So long as these expenses meet certain requirements, you may be able to choose how you treat them in your tax return.
The following information relates to the general prepayment rules and special prepayment rules which apply for small businesses from 2007-08 onwards.
When these rules apply
The prepayment rules apply when you have incurred expenses for goods or services that were not fully provided in the same income year in which the expense was incurred.
An example of such an expense may be an advertisement paid for in a newspaper or magazine, set to run every fortnight for six months:
In this case, the prepayment rules will apply if you pay for the advertising in March, and it is set to appear from April 1 through to September 30 in the following income year.
If you pay for the advertising in July, and it is set to appear from August 1 through to January 31 of the same income year, the rules do not apply as the services have been provided within the same income year that the expense was incurred.
How prepaid expenses should be treated
You are generally required by the prepayment rules to separate deductions for prepaid expenses of $1000 or more over the income years in which the corresponding goods or services were provided. However, if you are a small business, you can choose to deduct the prepaid expenses immediately.
Two-year amendment period for reviewing an assessment
This applies from the date the ATO issued your assessment. Your tax return, or that of your business, is generally accepted at face value and is not subject to further adjustment. Your return may be subject to verification and review by the ATO, even after you have received a notice of assessment.
If a review shows inaccuracies or ambiguities in deductions, income, entitlements etc, the ATO will attempt to amend your assessment within a time period called the ‘period of review’. This amendment period is the time in which you can lodge objections to a review, and provide evidence to support your original tax return. In some circumstances, the Commissioner will accept late objections so long as they are applicable and/or relevant.