Taxpayers can elect to value trading stock on hand at year-end at the lower of cost, market selling value, or replacement value. In our experience, taxpayers typically value their trading stock at cost. However, where the value of trading stock is less than cost (e.g. as a result of a decrease in commodity prices), taxpayers may find it beneficial to consider the alternative valuation options in order to realise tax deductions now, rather than when the stock is sold in a later period.
Several tax rulings were issued in the 1990s in relation to the use of ‘market selling value’ (MSV) to value trading stock in various industries. For example, Taxation Ruling TR 93/3 considers the methodology for determining MSV in the gold industry. It states that a notional market selling value can be adopted for partly processed gold stock where there is enough evidence to support the following calculation:
- Market spot price
- Less: Further estimated production costs
- Less: Estimated profit margin
Whilst there was no further guidance provided at the time, this methodology is similar to calculating ‘Mining Revenue’ for the purposes of the Minerals Resource Rent Tax (MRRT). Guidance provided to assist MRRT taxpayers is therefore helpful when preparing the necessary documentation to support positions adopted.
If stock is a material asset on your balance sheet, it is recommended that you consider your valuation options to quantify the potential cash tax benefits available.