Private ruling: Income tax - ordinary income
Date of advice: 22 May 2026
Published: 17 August 2026
Ruling period: A number of income years commencing in the year ending 30 June 20XX
Date scheme commenced: In the year ending 30 June 20XX

Ruling: Q1: Will the $ZZ 'Settlement Payment' as defined in the 'Special Conditions' of the contract be derived as ordinary income in accordance with section 6-5 of the Income Tax Assessment Act 1997 at the time of settlement? | A1: Yes. | Q2: Will each $YY (inc GST) 'Payment Instalment' as defined in the 'Special Conditions' of the contract be derived as ordinary income in accordance with section 6-5 of the Income Tax Assessment Act 1997 at the time that the conditions of Clause 5.1(2) of the 'Special Conditions' are met? | A2: Yes. | Q3: Will any amount of the 'Total Deferred Payment' not paid by the end of the 'Term' in accordance with the definitions contained in the 'Special Conditions' of the contract be derived as ordinary income in accordance with section 6-5 of the Income Tax Assessment Act 1997 on the last day of the 'Term'? | A3: Yes

Relevant facts and circumstances: 1. The entity is an Australian partnership (The Partnership). 2. The Partnership utilises the earnings/accruals basis to determine assessable income in any given year of income. 3. The Partnership acquired the property located at ADDRESS (The Property) in YYYY. 4. The Partnership acquired The Property with the intention to develop it and re-sell it at a profit. 5. The Property has been held as trading stock by The Partnership since its acquisition and reported as such in the income tax returns and financial statements of The Partnership. 6. An unrelated party (The Developer) offered The Partnership a purchase proposal. 7. A draft contract has been drawn up between the partners of the Partnership and The Developer (Draft Contract). 8. The Draft Contract contains Special Conditions which include the following terms: 1. Deposit The Deposit has been paid and released to the Seller unconditionally and is not refundable to the Buyer, unless the Seller defaults under this Contract. ... 5. Deferred Payment of Purchase Price and Security 5.1 The Parties Agree to add into this Contract the following special condition: (1) In this Special Condition: (i) "Total Deferred Payment" means $XX (incl GST) (ii) "Payment Instalment" means $YY (incl GST) (iii) "Term" means N years, where the term starts .... (iv) "Settlement Payment" means $ZZ of the Purchase Price (less any Deposit paid), adjusted in accordance with this Contract. (2) ... subject to the Buyer: (i) Completing this Contract on the Settlement Date or Such earlier date as agreed between the parties; and (ii) The Buyer may pay the Purchase Price as follows: A. the Settlement Payment at Settlement; and B. payment Instalments of $YY until the amount of the Total Deferred Payment is paid, where: C. each Payment Instalment is payable to the Seller within N days after EVENT; D. if the Total Deferred Payment is not paid by the end of the Term, the Buyer must pay the Seller the balance owning of the Total Deferred Payment on the last day of the Term; 5.2. This Special Condition is an essential term of this Contract and does not merge on Settlement..... 9. Settlement Date 9.1 The parties agree the Settlement Date will be the later of: (1) X days after the Contract Date; (2) Y Days after the Buyer enters loan documents with the Buyer's financier on terms acceptable to the Buyer. ,but no later than M months after the Contract Date.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 70-80(1)

Reasons for decision: Detailed Reasoning - All legislative references are references to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.: The following terms are used throughout in accordance with their use in the Special Conditions: • Total Deferred Payment • Payment Instalment • Term • Settlement Payment | Summary: For the purposes of section 6-5, items of income are derived under the earnings methods when a 'recoverable debt' is created. Income from the sale of land that is trading stock is derived when the debt accrued is due under the contract. The Settlement Payment amount is derived as ordinary income at the time of settlement. | Detailed Reasoning - Detailed reasoning: Typically the sale of real property results in a capital gain or loss and the timing of the event (CGT event A1) is generally the time when the contract for disposal is entered into. However, subsection 70-80(1) provides that the proceeds from the disposal of trading stock are to be included in assessable income as ordinary income: | Detailed Reasoning - 70-80(1): When you dispose of an item of your trading stock in the ordinary course of business, what you get for it is included in your assessable income (under section 6-5) as ordinary income. | Detailed Reasoning - Therefore, where real property is trading stock, the sale of such property results in ordinary income.: Subsection 6-5(2) requires Australian resident taxpayers to include in their assessable income, the ordinary income they derive during the income year. Subsection 6-5(4) states that when a taxpayer is working out whether they have derived an amount of ordinary income, and if so, when they have derived it, they are taken to have received the amount as soon as it is applied or dealt with in any way on their behalf or as they directed. | Detailed Reasoning - 6-5(2): If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.... | Detailed Reasoning - 6-5(4): 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. Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1) discusses the two commonly used methods of determining when income is derived in a relevant year of income - the receipts method and the earnings method, and provides the Commissioner's view regarding the factors that are relevant in determining when each method is the correct to bring income to account for tax purposes. When discussing how to determine which method of accounting is most appropriate TR 98/1 rules: | Detailed Reasoning - Ruling: 16. For the purposes of subsections 6-5(2) and (3) of the ITAA 1997, the two commonly used methods of tax accounting for items of income are the receipts and earnings methods. 17. When accounting for income in respect of a year of income, a taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. A method of accounting is appropriate if it gives a substantially correct reflex of income. Whether a particular method is appropriate to account for the income derived is a conclusion to be made from all the circumstances relevant to the taxpayer and the income. 18. The receipts method is likely to be appropriate to determine: • income derived by an employee; • non-business income derived from the provision of knowledge or the exercise of skill possessed by the taxpayer; and • business income where the income is derived from the provision of knowledge or the exercise of skill possessed by the taxpayer in the provision of services, subject to the qualifications listed at paragraph 45. 19. As a general rule, the receipts method is appropriate to determine income derived from investments. However, there are exceptions to the general rule (refer paragraphs 47 and 48). 20. The earnings method is, in most cases, appropriate to determine business income derived from a trading or manufacturing business. 21. In cases not clearly within the descriptions at paragraphs 18 to 20, the factors that may assist to determine the correct method of accounting for income are set out in paragraphs 52 to 59. In the majority of cases we expect that the earnings method would be the most appropriate method of determining the income that has been derived for tax purposes. 22. Where a taxpayer has business income from more than one business activity, a separate evaluation should be made for each activity and a determination made as to which method is appropriate for the accounting of that income. In most cases, the same method is likely to be appropriate for income from all of these business activities. Fine distinctions are not necessary where the differences between the various business activities are not significant. In relation to the earnings method and the point of derivation of income under this method, TR 98/1 states: | Detailed Reasoning - Earnings method: 9. The 'earnings' method is often referred to as the 'accruals' method or the 'cash and credit' method. Under the earnings method, income is derived when it is earned. The point of derivation occurs when a 'recoverable debt' is created. 10. The term 'recoverable debt' is used to describe the point of time at which a taxpayer is legally entitled to an ascertainable amount as the result of having performed an agreed task. A taxpayer may have a recoverable debt even though, at the time, they cannot legally enforce recovery of the debt. 11. Whether there is, in law, a recoverable debt is a question to be determined by reference to the contractual agreements that give rise to the legal entitlement to payment, the general law and any relevant statutory provisions. The case of Gasparin v Federal Commissioner of Taxation 94 ATC 4820 ( Gasparin ) considered when income was derived from the profit on the sale of real estate held as trading stock, where the contract was executed in one year and settled in the next. In Gasparin the taxpayer was a land developer who took part in a joint venture to subdivide land. The contracts for the sale of each lot were expressed to be conditional on registration with the Land Titles Office on or before 30 June 1985, and settlement was to be within 14 days of registration. Registration occurred by 30 June 1985 and some contracts were settled in the 1985 financial year with the remaining settled in the following financial year. The Court held that the income was derived from the sale of the allotments of land (trading stock) at settlement when a debt accrued due from each purchaser to the joint venturer, not at the earlier point in time when the contracts became unconditional. Von Doussa J, with whom the other Judges agreed, stated: at 4283: These principles were applied by the High Court in Sunbird Plaza Proprietary Limited v Maloney and Another (1987-1988) 166 CLR 245. In that case a contract of sale of a home unit provided for a 10 per cent deposit on the exchange of contracts and that the balance of the purchase price was payable ''upon settlement'' which was to occur within 14 days after notice from the vendor to the purchaser of the registration of a building unit plan. The terms of that contract bear similarity to the terms of the contracts of sale in the present case. In the events which happened settlement had not taken place and there had been no conveyance when the matter came before the Court. It was held that the balance of the purchase price had not become a debt payable by the purchaser. Mason CJ, with whom Deane, Dawson and Toohey JJ agreed, said at 253-254: "Here the balance of the purchase price was payable 'upon settlement'. Settlement has not taken place and there has been no conveyance of the property sold. Once this is accepted, the appellant is faced with a daunting task in making good the submission that the respondent guarantors are liable under their joint and several guarantee to pay the balance of the purchase price and interest thereon, notwithstanding the absence of an accrued liability on the part of the purchaser to make the payment.'' In my opinion the application of the general rule approved in these cases, and also in Automatic Fire Sprinklers Pty Ltd and Another v Watson (1946) 72 CLR 435 at 463-464, to the unsettled contracts of sale in the present case leads to the conclusion that at 30 June 1985 there were no debts owing by the purchasers to the joint venturers. In each case the promise to pay the balance of the purchase price ''at settlement'' remained executory until settlement occurred at which time a conveyance was executed, accepted and delivered to the purchaser. Until these events there was no accrued liability on the part of the purchaser to pay the balance of the purchase price.... at 4288: In my opinion it should be held that the joint venturers derived income from the sale of the allotments of land which comprised their trading stock not when the contracts became unconditional, but at settlement when a debt accrued due from each purchaser to the joint venturers. The critical consideration is the time when the debt arose. It should also be held that each allotment remained trading stock on hand until settlement, that being the point of time in a transaction for the sale of land under a contract of sale in the terms of those before the Court when the vendor finally loses all dispositive power, and the contingency that the sale will not proceed to completion disappears. | Detailed Reasoning - Application to taxpayer circumstances: In accordance with section 6-5 a taxpayer's assessable income includes ordinary income derived during the income year. For the purposes of subsections 6-5(2) and (3) the two commonly used methods of tax accounting for items of income are the receipts and earnings methods. The Partnership carries on a business as a property developer and has justifiably elected to utilise the earnings/accruals basis to determine assessable income in any given year of income. TR 98/1 confirms that under the earnings method income is derived when a 'recoverable debt' is created. That is, the point in time where a taxpayer is legally entitled to an ascertainable amount in accordance with the contractual agreements that have given rise to the legal entitlement to the payment as well as the general law and any relevant statutory provisions. Case law such as Gasparin similarly confirms that income from the sale of land that is trading stock is derived when the debt accrued is due under the contract. In relation to the $ZZ Settlement Payment, the Special Conditions state that the Settlement Payment is AUD$ZZ less any deposit paid and the Settlement Date is in accordance with Clause 9 of the Special Conditions. That is, a total of $ZZ will be paid by The Developer at the Settlement Date. At the Settlement Date the partners in The Partnership are legally entitled to the Settlement Payment. There is nothing further that the Sellers need to do under the terms of the contract to be entitled to the $ZZ Settlement Payment and the debt is a 'recoverable debt'. As such, the $ZZ Settlement Payment is derived as ordinary income at the time of settlement (the time of which is in accordance with Clause 9 of the Special Conditions ). | Summary: For the purposes of section 6-5, items of income are derived under the earnings method when a 'recoverable debt' is created. Income from the sale of land that is trading stock is derived when the debt accrued is due under the contract. Each $YY Payment Instalment as defined in the Special Conditions is derived at the time that the conditions of Clause 5.1(2) of the Special Conditions are met. | Detailed Reasoning - Detailed Reasoning: Refer to the reasoning discussed in Question 1 above. The same reasoning can be applied to conclude that each $YY Payment Instalment as defined in the Special Conditions is derived at the time that the conditions of Clause 5.1(2) of the Special Conditions are met. As discussed in Question 1 above, section 6-5 provides that a taxpayer's assessable income includes ordinary income derived during the income year. For the purposes of subsections 6-5(2) and (3) the two commonly used methods of tax accounting for items of income are the receipts and earnings methods. The Partnership carries on a business as a property developer and has justifiably elected to utilise the earnings/accruals basis to determine assessable income in any given year of income. Under the earnings method income is derived when a 'recoverable debt' is created. That is, at the point in time where a taxpayer is legally entitled to an ascertainable amount in accordance with the contractual agreements that have given rise to the legal entitlement to the payment as well as the general law and any relevant statutory provisions (See TR 98/1 and Gasparin ). Under the terms of the Special Conditions included with the Draft Contract the Payment Instalment amounts are payable to the Seller within N days after EVENT occurring. As they are paid, the payment of the Payment Instalment Amounts reduces the total amount remaining to be paid of the Total Deferred Payment. Any remaining balance of the Total Deferred Payment that is unpaid by the end of the Term of the Draft Contract is due on the last day of the Term per the Special Conditions (i.e. if the conditions of Clause 5.1(2)(ii) C. are not met the remaining Total Deferred Payment is not due until the end of the Term). Therefore, in accordance with the terms of the Draft Contract and accompanying Special Conditions, the taxpayers are legally entitled to each Payment Instalment Amount (which form part of the Total Deferred Payment) when the conditions of Clause 5.1(2) of the Special Conditions are met as that is when the recoverable debt will be created. As such each $YY Payment Instalment will be derived as ordinary income in accordance with section 6-5 at the time that the conditions of Clause 5.1(2) of the Special Conditions are met. | Summary: For the purposes of section 6-5, items of income are derived under the earnings methods when a 'recoverable debt' is created. Income from the sale of land that is trading stock is derived when the debt accrued is due under the contract. Any amount of the Total Deferred Payment not paid by the end of the Term in accordance with the definitions contained in the Special Conditions will be derived on the last day of the Term. | Detailed Reasoning - Detailed Reasoning: Refer to the reasoning discussed in Question 1 above. The same reasoning can be applied to conclude that any amount of the Total Deferred Payment as defined in the Special Conditions will be derived on the last day of the Term. Under the terms of the Special Conditions included with the Draft Contract the Total Deferred Payment is $XX and Payment Instalments of $YY are payable to the Seller in accordance with Clause 5.1(2)(ii)C. of the Special Conditions. The payment of the Payment Instalments reduce the balance of the Total Deferred Payment over the Term by each amount paid. At or before the end of the Term the Total Deferred Payment may be fully paid or there may be a remaining balance unpaid. Clause 5.1(2)(ii)D of the Special Conditions provides that if the Total Deferred Payment is not paid by the end of the Term, the Buyer must pay the Seller the balance owning of the Total Deferred Payment on the last day of the Term. Therefore, in accordance with the terms of the Draft Contract and accompanying Special Conditions, the taxpayers are legally entitled to any remaining Total Deferred Payment on the last day of the Term and any such amount will be derived as ordinary income in accordance with section 6-5 on the last day of the Term.