For business owners in industries such as hospitality and food retail, using small amounts of the business’ trading stock for personal use is a reality of day-to-day operations.
The ATO understands this, too, but did you know that if you are using stock for private purposes, it must be accounted for in your tax return? Fortunately, the ATO has guidance on how to value this stock, including a valuation option for certain businesses for whom it is not practical to keep thorough records.
Have you ever taken home an item of your business’ trading stock for your own personal use, or use by your family members? This is common in many businesses such as bakeries, butchers and cafés, but it does have some tax consequences. “Trading stock” means anything that you hold in the business for the purposes of manufacture, sale or exchange. Examples include a butcher who takes cuts of meat home for his family’s personal use or a café owner who consumes some of the food on hand in the café.
If you use any trading stock for personal use, you need to declare this in your business’ tax return. This is because you are treated as if you sold the trading stock to someone else, and the value of that stock is therefore assessable income.
The ATO accepts two different ways of accounting for this stock:
- an estimate based on ATO guidelines; or
- an actual value using your own records.
Method 1: ATO estimate
The ATO recognises that record-keeping in these circumstances is often difficult or impractical. To help business taxpayers, it publishes some estimates of personal use for selected industries. These are updated annually and expressed as a per annum value per person benefiting from the stock. The ATO’s estimates for the 2018-2019 income year are as follows:
|Type of business||Amount (excl. GST) for adult/child over 16 years||Amount (excl. GST) for child 4 to 16 years old|
|Takeaway food shop||$3,430||$1,715|
|Mixed business (includes milk bar, general store and convenience store)||$4,260||$2,130|
Example: Susan runs a takeaway business and often brings home various food items for her family to eat. These range from individual stock items through to portions of prepared food. It is not always practical to record the value of every item she brings home. Her family includes herself, her husband and one child aged 11 years. When preparing her business’ tax return, she uses the ATO estimates for takeaway shops for two adults (2 x $3,430) and one child (1 x $1,715), a total of $8,575.
Although Susan has not kept complete records, she is satisfied that this amount is a reasonable estimate of her family’s use. She declares this as assessable income in her return.
Method 2: actual value
Alternatively, a business may declare the actual value of goods taken from stock. This option would suit businesses who can show that they took a lesser amount for personal use than the estimates in the ATO’s guidelines. This option requires thorough record-keeping as you will need to keep details of:
- the date;
- a description of what was taken;
- the reason it was taken; and
- the cost or market value of the item (excluding GST).
Where the item is used by a sole trader, or all of the partners in a partnership for joint use, the value is recorded at cost. In other cases, market value applies.
If your use of trading stock for personal purposes is significantly greater than the ATO’s estimate, the actual amount should be used.
Get help from the professionals
Declaring private use of trading stock is just one aspect of the trading stock tax rules. Contact our office for expert assistance in preparing your business tax return. We take the stress out of taxes so that you are free to focus on running your business.