Private ruling: Business income
Date of advice: 31 August 2017
Published: December 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the income assessable when received for the 2016-17 income year? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5.

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 ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Business income is regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997. Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings sets out the Commissioner's guidelines on the derivation of income. Two commonly used methods of determining when income is derived are the receipts method and the earnings method. Under the receipts or cash method, income is derived when it is received. Under the earnings or accruals method, income is derived when it is earned. That is, the point of derivation occurs when a recoverable debt is created. As stated in paragraph 17 of TR 98/1, when accounting for income in respect of an income year, a taxpayer must adopt the method that, in the circumstances, is the most appropriate. The receipts method is likely to be appropriate to determine 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. A taxpayer who accounts for items of income on a receipts basis should continue to adopt that method until it is no longer appropriate. This may occur because of the expansion of the business. In this case, entity A’s main source of income is commissions. Based on the facts and full circumstances of the business, it is accepted that the cash or receipts method is appropriate for the 2016-17 income year.

Relevant facts: Entity A was established late in 2015. | Entity A operates a business. | The main source of income for entity A is commissions. | The timing of revenue earned to payment being received is varied and mostly out of entity A’s control. Typically invoices are generated by the business on a monthly basis after the revenue is earned. | Entity B initially started the business as a sole trader. The business was subsequently transferred to entity A. | For the 2015-16 income year, entity A was very much still in the start-up phase and relied on entity B’s personal efforts to grow the business. With the exception of the principals of the business who are paid a salary, entity A has no other employees and external contractors were only engaged as required on short-term assignments. Accordingly revenue was recognised on a cash (receipts) bases for the 2015-16 income year. | As at 1 July 2016, the business was still in the early stages of implementing expansion plans and it was expected to take at least another 6-12 months. Accordingly revenue continued to be recorded on a cash(receipts) basis for the 2016-17 income year. | By mid-2016, the plan to build the business was under way. | The business has increased revenue more than predicated at the beginning of the 2016-17 income year. | A copy of the profit and loss statements for the 2015-16 and 2016-17 income years was provided. | There is potential volatility with ongoing revenue streams.