When Australians hear ‘FIFO’, they might first think of the mining sector’s fly-in, fly-out workers. But in the world of finance and accounting, FIFO—First In, First Out—plays a pivotal role in how businesses and investors manage their assets and navigate tax time. With 2025 bringing new economic pressures and subtle policy shifts, understanding FIFO is more than academic: it can make a tangible difference to your bottom line.
What is FIFO and Why Is It So Important?
FIFO (First In, First Out) is an inventory and asset management method. It assumes that the first items purchased or produced are the first to be sold or used. In practice, this means your oldest stock (or investment lots) is recorded as being sold first, which has significant implications for accounting, taxation, and even cash flow management.
- Inventory management: FIFO ensures that older goods are moved first, reducing the risk of obsolescence—particularly critical for perishable or rapidly depreciating items.
- Tax implications: The cost assigned to sold goods (COGS) and the remaining inventory value on the balance sheet changes based on FIFO, affecting taxable income and reported profit.
- Investment strategy: For shares and ETFs, FIFO rules dictate which parcel is ‘sold’ for capital gains tax purposes, potentially altering your tax bill significantly.
FIFO in 2025: Regulatory Updates and Economic Realities
This year, the Australian Taxation Office (ATO) has reiterated its stance on FIFO as the default method for inventory valuation unless another method (such as LIFO or weighted average) is more appropriate and justifiable. For share investors, the ATO continues to require FIFO unless you can specifically identify which parcel of shares is being sold—something only possible if your broker or trading platform allows for detailed parcel selection.
In 2025, rising inflation and supply chain hiccups mean the choice of FIFO versus other methods could dramatically impact reported profits and tax obligations:
- During inflation: FIFO means older (and usually cheaper) inventory is expensed first, leading to lower COGS and higher taxable profit. This can boost reported profits but may also increase your tax bill.
- Supply chain disruptions: With global volatility still lingering, businesses holding inventory for longer periods may face greater swings in profit and loss due to the timing of stock purchases and sales under FIFO.
For investors, the sharp volatility in the ASX and global markets in 2024-2025 means the order in which you acquired and sold shares can have a big impact on your capital gains tax (CGT) position. FIFO may result in higher capital gains if your earlier purchases were at a lower price, especially after the strong post-pandemic market rally.
Real-World Examples: FIFO in Action for Australians
Business Example: Imagine a Sydney-based electronics retailer holding two batches of smart TVs: 100 units purchased in January at $800 each, and 100 units in June at $950 each. By December, they sell 120 units. Under FIFO, the first 100 units sold are valued at $800 each, and the next 20 at $950. This boosts reported profit (and taxable income) compared to a method that averages costs or uses the most recent (higher) purchase cost first.
Investor Example: Let’s say you bought 500 shares of an ASX-listed company at $10 in 2022, and another 500 at $15 in 2024. You sell 600 shares in February 2025 at $18 each. FIFO means your first 500 shares (at $10) and the next 100 shares (at $15) are treated as sold, resulting in a larger capital gain than if you could choose to sell the newer (higher-cost) parcel first.
Tax Year 2025: With the ATO’s digital record-matching expanding further this year, businesses and investors using FIFO must ensure their records are airtight. Errors or inconsistency in parcel tracking could trigger audits or disputes, especially as the ATO focuses on capital gains and inventory reporting accuracy in the 2025 tax season.
FIFO vs. Other Methods: When Does It Make Sense?
FIFO remains the default for most Australian businesses and investors, but alternatives like LIFO (Last In, First Out—generally not allowed in Australia) or weighted average cost can sometimes be more tax-efficient, especially during periods of rapid price changes. However, the ATO rarely approves deviations from FIFO unless you have robust, documented justification.
- Best for: Retailers with fast-moving goods, investors who want to keep things simple, and businesses seeking to maximize reported profits in a stable or rising price environment.
- Consider alternatives if: Your inventory is highly volatile, or you have the systems and records to justify a different method that better matches your business reality.
For most Australians in 2025, sticking with FIFO is both the path of least resistance and the one most likely to satisfy regulators.
The Bottom Line: Getting FIFO Right in 2025
FIFO may seem like a back-office detail, but in Australia’s current climate of inflation, tax scrutiny, and market volatility, it can make or break your financial outcomes. Whether you’re running a business or managing your share portfolio, understanding how FIFO works—and ensuring your records and systems are up to scratch—should be a top priority this year.
