Writing off obsolete stock in Australia: the ATO rules, and when selling is better

At the end of the financial year, many businesses look at a corner of the warehouse and ask the same thing: can we just write this off? Sometimes that's sensible. But a write-off is an accounting entry, not a buyer. The stock is still there, still taking up space, and still worth something to somebody.

This guide explains, in general terms, how the ATO treats trading stock and obsolete stock, and why selling it is often the better move.

Important: this is general information, not tax advice. Tax depends on your circumstances. Talk to your accountant before you value, write off, donate or sell stock. We link to the ATO's own pages so you can check the details.

How does the ATO let me value trading stock?

At the end of each income year you value each item of trading stock using one of three methods. The ATO's page on valuing trading stock describes them. In summary:

The ATO also explains that you can choose a different method each year for different items of stock. That's why people talk about valuing stock at the "lower of cost, market selling value or replacement value". You can, in general, pick whichever suits each item.

How do the general trading stock rules work?

You compare the value of stock at the start and end of the year. Under the ATO's general trading stock rules, you must do an end-of-year stocktake and record the value of all trading stock on hand. If closing stock is worth more than opening stock, the increase is added to assessable income. If it's worth less, the ATO explains that you can reduce your assessable income by the difference.

So a lower closing value for obsolete stock reduces taxable income in that year. It doesn't create a refund on its own, and it doesn't turn the stock into cash.

Is there a special value for obsolete stock?

Yes. A business can elect to value an item below all three normal methods because of obsolescence or other special circumstances. The ATO's company tax return instructions for closing stock explain that a company may elect to value an item of trading stock below the lowest of cost, market selling value and replacement value because of obsolescence or other special circumstances, and that the value elected must be reasonable.

The return asks whether the election was made, and the ATO has further guidelines on valuations where obsolescence or other special circumstances exist.

What counts as "reasonable" is a question for your accountant. In practice, real evidence of what the stock would actually fetch tends to be more persuasive than a guess. A genuine offer from a buyer is one kind of evidence. Your accountant will decide what's appropriate.

Do the simplified rules apply to small businesses?

They may. The ATO's simplified trading stock rules are available to small businesses with aggregated turnover under $10 million, and, for income years starting on or after 1 July 2021, to some businesses with turnover from $10 million to under $50 million.

If you reasonably estimate your trading stock changed in value by $5,000 or less in the year, you don't have to do a formal stocktake. But if you do one anyway, the ATO says the general rules apply. Ask your accountant which approach suits you.

Can I get a tax deduction for donating stock?

Possibly. The ATO's page on donating trading stock explains that if you donate trading stock outside the ordinary course of your business, it may be tax deductible, generally at the market value of the stock on the day you donate it. If you're registered for GST, that value is reduced by the GST credit you'd have been entitled to.

The same page explains that you may also need to include the market value of the donated stock in your assessable income. The recipient also matters. Your accountant can tell you how the numbers work for your business.

Donation platforms such as GIVIT and Good360 Australia connect businesses with charities that need goods. Our guide to who buys excess stock in Australia explains how they work.

Why does selling obsolete stock often beat writing it off?

Because a sale puts cash in the bank now, and a write-off doesn't. A lower stock value reduces taxable income, so the most it can save is tax on that amount. A sale brings in cash that you can spend on stock that does sell, pay down debt or cover wages.

There are other reasons too:

• Space. Obsolete stock takes up warehouse space you're paying for.
• Time. Value usually falls as stock ages, especially anything with a date or a season.
• Certainty. A sale is final. Stock written down on paper still has to be dealt with physically, and someone has to decide what to do with it.
• Evidence. A real offer tells you and your accountant what the stock is worth, rather than a guess.

"Obsolete" to you often isn't obsolete to everybody. A discontinued line, last season's packaging or a product your main customer dropped may suit a discount chain, an overseas buyer or a charity. We've sold 27 semi-trailers of a discontinued paint product. Our guides to dead stock and discontinued stock cover more examples.

Whether a sale, a write-down, a donation or a mix is best for you in tax terms is a question for your accountant. What we can do is tell you what the stock would sell for, so that decision is based on a real number. Read how stock buyers work out what your stock is worth.

What makes stock "obsolete" in practice?

In everyday business use, obsolete stock is stock that can no longer be sold in the way it was meant to be. Whether it qualifies for a lower tax value is a separate question for your accountant. Common causes we see:

• A new model or formulation. The old version still works, but your customers want the new one.
• Packaging or labelling changes. New artwork, a new barcode, a rebrand or a regulatory change makes old stock awkward to supply.
• A lost customer. The retailer that took the line has deleted it, and nobody else in your channel wants it.
• Licence changes. A licensed character or brand agreement has ended, limiting where the stock can go.
• Dates. Food, health and beauty and other dated goods getting close to best-before or expiry.
• Seasons and trends. Last season's colours, styles or themes.

Most of these describe stock that's obsolete to you, not stock that's worthless. A different market, a different country or a different kind of buyer may want it. That's the gap a stock buyer works in.

What's the difference between a write-down, a write-off and a disposal?

The words get used loosely, so it helps to separate them.

The tax and accounting treatment of each is different, and depends on your circumstances. That's exactly why the conversation with your accountant matters. A write-down or write-off still leaves you with a physical problem to solve.

What's a sensible order of steps at year end?

Here's a practical sequence many businesses follow. Your accountant may suggest something different.

1. Identify slow, dated and discontinued lines before your stocktake, not after.
2. Get a real market view of what they'd fetch. Send a stock list spreadsheet (SKU, description, quantity, cost or RRP if you're happy to share, best-before dates), photos and the location.
3. Talk to your accountant about valuation, any obsolescence election, and whether to sell, donate or dispose.
4. Act on the decision before dates and seasons erode value further.
5. Keep records of the stocktake, offers, sale documents or donation receipts.

Who is John, and why does he care about the numbers?

John Coorey is our Managing Director. He spent time at a Big 4 accounting firm, and was previously Asia-Pacific Managing Director of a well-known battery manufacturer. That means he understands why finance teams care about stock values and year-end timing. It doesn't mean we give tax advice; we don't. We buy the stock, quickly and discreetly, and leave the tax to your accountant.

How do I get an offer?

There's no fee to ask.

Send your stock list, photos and location through our contact page, or read how selling excess stock to us works. We buy from anywhere in Australia, from New Zealand and internationally, and there's no minimum parcel size.