Private ruling: Business Income
Published: June 2014
Ruling period: Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the funds deposited into your trust account by your clients represent assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) when initially deposited? | A1: No | Q2: Will the funds received into your trust account which are subsequently paid, on behalf of your client, to a government department be assessable income under section 6-5 of the ITAA 1997? | A2: No | Q3: Will the service fee transferred into your business account represent assessable income under section 6-5 of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: You operate a business where you provide services to clients. As part of the practice of your business you receive money from clients into a trust account. The money paid into your trust account includes amounts to be paid to a government department on behalf of your clients and an amount for a service fee which is paid into your business account once services have been provided.

Relevant legislative provisions: Income Tax Assessment Act 1997

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Subsection 6-5(4) of the ITAA 1997 states: In working out whether you have derived an amount of * ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. The Commissioner has indicated in TR 98/1, based on Barratt & Others v. Federal Commissioner of Taxation (1992) 36 FCR 222; (1992) 23 ATR 339; 92 ATC 4275, that the point at which income is earned is generally when a recoverable debt comes into existence and this may occur before the point at which the taxpayer can legally enforce recoverability of the debt. All that is required is that there must be a present right to receive a quantified amount without the presence of any element of contingency or defeasibility. In this case, when the clients deposit their instalment payments into the trust account, the company is effectively holding the clients' money on trust to be used for the purposes directed by the clients. The company is not the beneficial owner of the money until such point in time when the work has been completed (or the application withdrawn) and the company invoices the client for the relevant amount. Accordingly, you do not 'derive' the income until the invoice for the relevant client has been issued allowing for the amount to be transferred from the trust account to your business account. Professional fees and service fees (for withdrawals) will be assessable at this point in time. Additionally, as you never hold beneficial ownership of the money paid to the government department you have not derived income upon receipt of that amount, nor have you incurred a deductible expense when that money is paid to the government depart.