Who can claim
This deduction is available to individuals and companies.
- The expense is incurred in carrying on an existing income-producing business.
- Any private, capital or non-income-producing component is reasonably apportioned or excluded.
- The goods are trading stock or a direct cost of producing goods sold in the ordinary course of the business.
What you cannot claim
- Do not include private drawings or personal expenses.
- Do not treat a capital asset, improvement or acquisition cost as an ordinary operating expense.
- Private stock withdrawals must be accounted for.
- Capital equipment is not trading stock.
- Do not duplicate purchases, freight or direct labour already entered under another expense rule.
How the amount is worked out
Calculate cost of sales as opening stock plus purchases and other direct costs, including eligible freight and direct labour, minus closing stock. Value each closing-stock item at cost, market selling value or replacement value, with the special obsolescence rule where applicable. An eligible small business only has to account for the stock change when the difference between opening stock and a reasonable closing-stock estimate is more than $5,000, but may choose to account for it when the difference is $5,000 or less.
Records the ATO expects
- Supplier invoices
- Freight and direct-labour records
- Stocktake records
- Opening and closing stock calculation
- Closing-stock valuation and obsolescence evidence
Where this rule comes from
Primary source: Income Tax Assessment Act 1997 Division 70 (Section 70-35 trading-stock adjustment). Reviewed 30 July 2026. Covers the 2025-26 and 2026-27 income years.
Supporting sources:
- Income Tax Assessment Act 1997 section 70-45 (Section 70-45 closing-stock valuation)
- Income Tax Assessment Act 1997 section 328-285 (Section 328-285 $5,000 trading-stock choice)
- ATO business income and deductions (Updated 1 June 2023)