Deductions and Trading Stock
General and specific deductions
Deductions arise under s 8-1 (general deductions) and specific provisions (e.g. depreciation, repairs, bad debts). For s 8-1, an outgoing must be incurred in gaining or producing assessable income and not be capital, private or domestic, or incurred in gaining exempt income. The positive limbs and negative limbs must both be applied.
Key deduction categories
Understand the distinction between repairs (deductible) and improvements (capital, depreciated), between revenue and capital outlays, and the treatment of prepaid expenses (the 12-month rule). Know the rules for bad debts (written off and previously included in income), superannuation contributions, and the small business simplified depreciation rules.
Trading stock
Trading stock is anything produced, manufactured or acquired for manufacture, sale or exchange. The tax outcome is: opening stock + purchases − closing stock = cost of sales. Taxpayers may value closing stock at cost, market value or replacement value, and must use the same method consistently. Understand the trading stock rules for obsolete stock and the small business concessions.
Traps and worked example
A common trap is claiming a deduction for a capital improvement as a repair, or deducting private expenses. Another is failing to adjust for closing stock, which overstates cost of sales.
Worked example: opening stock $20,000, purchases $80,000, closing stock $30,000. Cost of sales = 20,000 + 80,000 − 30,000 = $70,000, which is the deductible amount. Rule of thumb: repairs restore, improvements add; only restoration is immediately deductible.