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Income Tax Act 2007

Timing and quantifying rules - Valuation of trading stock (including dealer’s livestock)

EB 22: Valuing closing stock consistently for low-turnover traders

You could also call this:

“Small businesses must value leftover stock consistently each year for tax purposes”

If you own a small business that doesn’t sell a lot of goods, you need to be consistent in how you value your leftover stock at the end of the year. This is important for your taxes.

If you follow accepted accounting rules, you must stick to the same method and tell people if you change it, as required by a standard called NZIAS 8.

If you don’t use these accounting rules, you still need to be consistent each year. This means using the same way to value your stock, whether it’s based on cost, a lower selling price, or what it would cost to replace. You also need to keep using the same method to figure out the cost of your stock and how much of your other expenses you include in that cost.

You can only change your method if you have a good business reason. Trying to pay less tax or delay paying tax isn’t a good enough reason. You might also need to change if another rule says you have to.

If you do change your method, you need to keep careful records of why you changed and how you did it. This is required by section 22 of the Tax Administration Act 1994.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1514332.

Topics:

Money and consumer rights > Taxes

Business > Industry rules

EB 21: Market selling value for low-turnover traders, or

“Low-turnover traders can value closing stock at market selling price”

EB 23: Valuing closing stock under $10,000, or

“Simplified valuation method for small businesses with low-value stock”

Part E Timing and quantifying rules
Valuation of trading stock (including dealer’s livestock)

EB 22Valuing closing stock consistently for low-turnover traders

In determining the value of closing stock at cost, discounted selling price, or replacement price, a low-turnover trader who complies with generally accepted accounting practice must comply with the consistency and disclosure requirements of NZIAS 8 or an equivalent standard issued in its place.
A low-turnover trader who does not comply with generally accepted accounting practice must be consistent from 1 income year to the next in—
their choice of valuing closing stock at cost, discounted selling price, or replacement price; and
their use of market selling value, if it is greater than cost; and
their use of a cost-flow method of allocating costs under section EB 7(1) to (5); and
the extent to which they include indirect costs in the cost of trading stock that they manufacture or produce; and
their method of calculating discounted selling price.

A low-turnover trader to whom subsection (2) applies may make changes in relation to the matters described in the subsection if—
the change is justified by sound commercial reasons and for this purpose, the advancement, deferral, or reduction of an income tax liability is not a sound commercial reason; or
the change is required by another provision in this subpart.

A low-turnover trader who makes a change as described in subsection (3) must keep sufficient details of the change, and the reasons for the change, under section 22 of the Tax Administration Act 1994.

Compare

2004 No 35 s EB 22

Notes

Section EB 22(1): amended, on 1 April 2008, by section 353(1) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
Section EB 22 list of defined terms NZIAS 8: inserted, on 1 April 2008, by section 353(2) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).