Trading Stock (Revenue Assets) – Div 70

What is Division 70?

Division 70 deals with the amounts that you can deduct, and amounts included in your assessable income, because of these situations:

  • You can acquire an item of trading stock;
  • You can carry on a business and hold trading stock at the start or the end of the income year;
  • You dispose of an item of trading stock outside the ordinary course of business, or it ceases to be trading stock in certain other circumstances.

Basic 3 rules:

  1. Cost of stock/raw materials/inputs are deductible in s 8-1.
  2. Proceeds from sales of trading stock are ordinary income in s 6-5.
  3. Reconciliation: compare value of stock on hand at the end of the year to the value at the beginning of the year in s 70-35.

If value has gone up, the increase is included in income and if the value has gone down, the decrease is available as a deduction. 

What is trading stock? Legislation…

In s 70-10 ‘trading stock includes (a) anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business and (b) live stock’ 

Turns on the relationship of the asset to the business – how is the asset to be used in relation to the business carried on? 

  • Land can be trading stock (such as in the St Hubert’s Island case)
  • Choses in action (shares) can be trading stock (Investment and Merchant Finance)
  • Raw materials and unfinished goods can be trading stock
  • Compare spare parts and consumables
  • WIP from performing services isn’t dealt with the same

Distinguish items of trading stock from the source of trading stock and distinguish goods for hire.


The taxpayer ordered $40,000 of trading stock from its supplier in Germany in May and received an invoice for the stock on 22 June. The German manufacturer has yet to assemble or ship the stock to Australia. Which of the following statements is the most accurate? 


The $400,000 is not deductible in the year ending 30 June but will be deductible once the stock comes under the taxpayers’ control.


Assume a business starts in Year 1: (a taxpayer acquires 100 gadgets for $10 each and sells 90 gadgets for $11 each. Therefore the taxpayers still holds 10 gadgets at the year-end). Assume in Year 2: (the taxpayer sells 10 gadgets for $12 each, and no further transactions occur).



Basic accounting for trading stock: 

Transactions are all on the revenue account and costs are deductible in s 8-1. Business expenses, the costs of acquisition as well as costs related to production.

When is derived?

If it is a cost in connection with acquiring an item of trading stock, then only when trading stock is on hand in s 70-15.

  • Costs to acquire trading stock are not capital in s 70-25
  • Proceeds are assessable as ordinary income in s 6-5

When the trading stock is no longer on hand?

Compare opening (beginning of tax year s 70-40) and closing value (end of tax year s 70-45) of trading stock on hand in s 70-35.

Options for valuation of stock on hand at year end: s 70-45

1. Cost: easy if simply purchase finished goods and sell on 

  • Cost for manufacturers: absorption costing (Philip Morris & Kurts Dev)

2. Market selling value: what is the relevant market? (Australasian Jam) 

3. Replacement value 

4. Valuation method chosen for “each item” 

5. Can change year to year 

How do you know which particular items are still on hand, to work out their value?

  • Tracing may be difficult, therefore can use: First-in-first-out (FIFO) and Average cost

Special transactions

1. Disposal outside the ordinary course of business in ss 70-90 & 70-95.

  •  the amount in income (calculation issue)
  • Valuation Issue: Deems price = market value (valuation issue) 

2. Non-arm’s length acquisition in s 70-20

  • Domestic transfer pricing 
  • Only for over-payment 

3. Moving assets in/out of trading stock 

  • Assets becoming trading stock in s 70-30 – deemed sale & repurchase for either cost or market value (txp chooses) 
  • Assets ceasing to be trading stock in s 70-110 – deemed sale & repurchase but must use cost


  • Whitfords Beach case (Acquired not held as trading stock)
  • J Rowe case, net profit accounting 70-35 increase in stock value included income

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