Sales look strong, yet the bank balance does not. For a business that sells products, the gap is often cost of goods sold, and a careless stock figure at 30 June can push your profit and your tax bill in the wrong direction.
This guide explains what COGS is, how the ATO trading stock rules work, the three ways you can value closing stock, the $5,000 simplified trading stock rule, and where the numbers go in the 2025-26 tax return. The rules were checked against ATO trading stock guidance in October 2026 and apply the same way for 2026-27.
It is written for retailers, wholesalers, cafés, online sellers, manufacturers and tradies who hold materials. If you want to see how COGS fits into your wider accounts, read our profit and loss statement guide.
Key takeaways
- COGS = opening stock + purchases and direct costs – closing stock.
- Closing stock can be valued at cost, market selling value or replacement value, item by item.
- Small businesses can skip a stocktake if the estimated change in stock value is $5,000 or less.
- The simplified rules are available to businesses with aggregated turnover under $10 million (and under $50 million for income years from 1 July 2021).
- Exclude GST from stock values if you can claim GST credits.
- This year’s closing value automatically becomes next year’s opening value.
COGS and trading stock at a glance
| Item | What it means | Where it comes from |
|---|---|---|
| Opening stock | Value of stock on hand at 1 July | Last year’s closing stock figure |
| Purchases and other costs | Stock bought plus costs directly related to it | Supplier invoices, freight, duty, delivery |
| Closing stock | Value of stock on hand at 30 June | Stocktake or, if eligible, a reasonable estimate |
| Cost of goods sold | Opening stock + purchases – closing stock | Your profit and loss statement |
| Gross profit | Sales – cost of goods sold | Before overheads such as rent and wages |
Source: ATO accounting for trading stock, ATO valuing trading stock, ATO simplified trading stock rules, checked 7 October 2026.
What is cost of goods sold?
Cost of goods sold, often called cost of sales, is the direct cost of the products you sold during the year. It sits between sales and gross profit on your profit and loss statement. Overheads such as office rent, insurance, marketing and admin wages come after gross profit.
For tax, COGS is not a separate deduction category. It is the combined effect of deducting stock purchases and then adjusting for the change in the value of stock you still hold. If closing stock is higher than opening stock, the increase is added to your assessable income. If it is lower, the decrease is deductible.
What counts as trading stock?
The ATO defines trading stock as anything your business acquires, produces or manufactures for the purpose of manufacturing, selling or exchanging. Livestock is also trading stock.
Some things are not trading stock, including:
- standing or growing crops, timber or fruit until harvested
- spare parts held for repairs and maintenance
- goods held for hire or rental rather than sale
- consumables used in manufacturing, such as cleaning agents
Stock you take for private use must also be accounted for, so a café owner taking food home or a retailer giving products to family members cannot simply leave it out of the figures.
How do you calculate COGS?
The formula is the one used in the ATO worksheet for the business and professional items schedule:
Opening stock + purchases and other costs – closing stock = cost of goods sold
- Opening stock is last year’s closing value, carried forward automatically.
- Purchases and other costs include the purchase price plus freight, insurance, customs and excise duties and delivery charges needed to bring stock to its current condition and location.
- Closing stock is the value of what is left at 30 June, using one of the three valuation methods below.
Software can track this during the year, and the MYOB guide to COGS explains how inventory settings feed the figure. The year-end valuation is still your responsibility.
How can you value closing stock?
The ATO valuing trading stock page allows three methods, and you can choose a different method each year for different items.
| Method | How it works | When it suits |
|---|---|---|
| Cost | All costs of bringing stock to its current condition and location, such as price, freight, insurance, duties and delivery | Most stock that will sell at a normal margin |
| Market selling value | What the stock would sell for in the normal course of your business | Lines that will sell for less than they cost |
| Replacement value | Cost of an almost identical item available in the market on the last day of the income year | Stock whose replacement cost has fallen |
Choosing the lowest value item by item reduces closing stock, which increases COGS and lowers taxable income this year. Because closing stock becomes next year’s opening stock, it mostly shifts timing rather than removing tax. Stock that is obsolete can be valued below all three methods through a trading stock election, which is reported separately in the schedule.
What are the simplified trading stock rules?
Under the simplified trading stock rules, you do not have to do a formal stocktake or account for the change in value if you reasonably estimate that your trading stock changed by $5,000 or less during the year. The rules are available to small businesses with aggregated turnover under $10 million, and to businesses under $50 million for income years starting on or after 1 July 2021.
- Your estimate must be made in good faith following a rational process, and you must be able to explain it if the ATO asks.
- If you use the rule, closing stock is treated as the same value as opening stock.
- You can still do a stocktake. If you do, you apply the general rules and account for the change, even if it is under $5,000.
Example from the ATO: a knitwear store with $5,600 of opening stock estimates closing stock at $8,000. The $2,400 change is under $5,000, so no stocktake is needed. If the estimate were $12,000, the $6,400 change would require a stocktake.
Where does COGS go in your tax return?
Sole traders and partnerships report stock in the business and professional items schedule. In the 2026 schedule instructions, item P8 has opening stock at label K, purchases and other costs at label L, and closing stock at label M, where you also show whether you used cost, market selling value or replacement value. Companies report equivalent figures in the company tax return.
For other costs you can claim alongside COGS, see our guides to small business tax deductions and sole trader deductions.
Worked example: a small hardware store
A sole trader with aggregated turnover under $10 million has sales of $300,000 for 2025-26, opening stock of $42,000, purchases of $180,000 and inbound freight of $4,000. A stocktake values closing stock at cost at $46,000.
- COGS: $42,000 + $180,000 + $4,000 – $46,000 = $180,000
- Gross profit: $300,000 – $180,000 = $120,000
- Gross margin: $120,000 / $300,000 = 40%
The change in stock value is $46,000 – $42,000 = $4,000, which is $5,000 or less. If the owner had reasonably estimated this instead of counting and chosen the simplified rule, closing stock would be taken to equal opening stock of $42,000. COGS would then be $42,000 + $184,000 – $42,000 = $184,000 and gross profit $116,000. The $4,000 difference is not lost: it simply is not brought to account this year.
Rule of thumb: if your stock levels barely move year to year, the simplified rule saves a count. If stock is growing fast or includes slow movers you want to write down, do the stocktake and value each line carefully.
Common mistakes with COGS and trading stock
- Putting overheads in COGS: rent, marketing and admin salaries belong below gross profit, not in cost of sales.
- Leaving GST in stock values: if you claim GST credits, value stock excluding GST.
- Guessing without a process: a simplified-rule estimate must follow a rational method you can explain.
- Ignoring private use: stock taken for yourself or family must be accounted for.
- Changing opening stock: it must equal last year’s closing value; you cannot reset it.
FAQ about COGS and trading stock
What does cost of goods sold include in Australia?
Cost of goods sold is opening stock plus purchases and other costs directly related to trading stock, less closing stock. Purchase price, inbound freight, insurance in transit, customs duty and delivery charges are part of stock cost. General overheads such as office rent, marketing and admin wages are separate business expenses, not cost of sales.
Do I have to do a stocktake every year?
Not always. If you are a small business and you reasonably estimate that your stock value changed by $5,000 or less over the year, the simplified trading stock rules let you skip a formal stocktake. You must be able to explain how you reached the estimate. If the change is more than $5,000 you must do a stocktake.
Which valuation method should I use for closing stock?
You can value each item at cost, market selling value or replacement value, and you can choose a different method for different items each year. Many businesses use cost for most items and a lower value for slow or damaged lines. Whatever you choose, the closing value becomes next year’s opening value automatically.
Is GST included in my stock values?
Generally no. If you are entitled to GST credits on your purchases, the ATO says you exclude the GST component when you calculate the value of your trading stock. If you are not registered for GST and cannot claim credits, the GST you paid forms part of your cost.
Where does COGS go in my tax return?
Sole traders and partnerships report opening stock, purchases and other costs, and closing stock in the business and professional items schedule. In the 2026 instructions these are labels K, L and M at item P8, and you also show the valuation method used for closing stock. Companies report similar figures in the company return.
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This article is general information only and is not personal tax or legal advice. Figures and rules were checked against the ATO trading stock, valuing trading stock and simplified trading stock pages and the 2026 business and professional items schedule instructions on 7 October 2026. Rates and thresholds change, so confirm the current position before acting.
