Private ruling: Assessable income
Published: August 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Does the payment you received from Company X form part of your assessable income for the year ended 30 June 2012? | A1: Yes.

Relevant facts and circumstances: You are a business. You entered into a co-operative research project agreement with Company X. The project consists of four stages. Under the agreement you will receive two payments. The first payment was to be paid after providing satisfactory test results for stage one of the project to Company X. If you terminate the agreement after stage two you are required to repay the payments back to Company X. You provided Company X with the proposal for stage one of the co-operative research activities and stated the amount of the fee for this service during the 2011-12 financial year. Company X created a purchase order for fee in relation to the agreement. You received the fee during the 2011-12 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 states that, if you are an Australian resident, you assessable income includes ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Proceeds from carrying on a business are income according to ordinary concepts and are included in assessable income. In Esso Australia Resources Ltd v FC of T 98 ATC 4768; (1998) 39 ATR 394 ( Esso) the taxpayer carried on the business of exploring for, producing and selling oil and gas. The taxpayer entered into a joint venture agreement whereby H Ltd was required to pay a portion of the costs of drilling. Under the agreement H Ltd elected to make payments directly to the taxpayer. The court held that the payment by H Ltd was assessable income as it was either received within the ordinary course of the taxpayer's business or resulted from some profit-making purpose of the taxpayer. Further, the rights of the taxpayer under the joint venture agreement were not lost or altered by the payment and the taxpayer did not deprive itself permanently of any capital asset when it received the payment. Your situation is similar to that in Esso as you have received a payment from Company X as part of a co-operative research project agreement. The project forms part of your business activities. Therefore, the payment from Company X forms part of your assessable income as it is a proceed from carrying on your business. | Detailed Reasoning - Timing of assessable income: Income is assessable when it is derived. The question of when income is derived depends on the nature of the income and, in some cases, on the nature of the income-earning activities of the taxpayer who derived the income. Generally, income is derived upon its receipt or when the right to receive it arises as a debt due and owing. In your situation, a debt became due and payable to you by Company X when they raised a purchase order as part of accepting your stage one proposal. Additionally, you received the payment in the 2011-12 financial year. As both of these events occurred during the 2011-12 financial year, the payment will be included in your assessable income for that year. The fact that you will be required to repay the payment if you terminate the agreement in the future does not affect when the income is included in your assessable income. The payment from Company X forms part of your assessable income for the year ended 30 June 2012.

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