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Edited version of private ruling
Authorisation Number: 1011824290965
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Ruling
Subject: Personal Services Income
Question
Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) should you return your income for tax purposes on a receipts (cash) basis for the years ended 30 June 2012, 30 June 2013, and 30 June 2014.
Answer
Under subsection 6-5 (2) of the ITAA 1997 should you return your income for tax purposes on a receipts (cash) basis for the years ended 30 June 2012, 30 June 2013 and 30 June 2014.
Yes.
This ruling applies for the following periods:
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commences on:
1 July 2011
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
1) A trustee of a trust (you) has applied for a Private Binding Ruling for the 2011-12, 2012-13 and 2013-14 financial years.
2) You have applied in relation to the personal services income an individual generates through you by the provision of her professional services.
3) The scheme or arrangement is as follows:
· You will provide professional services using the individual's professional expertise.
· You will provide the professional services to an associated entity in return for fees paid under a contract. These fees will equate to what would otherwise be the net income of that entity. Fees will flow in a timely manner to you.
· All of your income would be from one source, the associated entity.
· You will have a modest turnover from the provision of the individual's services
Relevant legislative provisions
Income Tax Assessment Act 1997 6-5(2).
Reasons for decision
Method of Returning Income
You seek a ruling on whether you should return the ordinary income you derive on a receipts (cash) basis or on an earnings basis.
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) requires Australian resident taxpayers to include in their assessable income ordinary income derived directly or indirectly from all sources, whether in or out of Australia.
Income returned can be accounted for using the receipts (cash) method or the earnings (accrual) method.
Taxpayers must adopt the method of accounting which provides the 'substantially correct reflex' of income. Taxpayers cannot elect to adopt whichever method that they prefer.
Taxation Ruling TR 98/1 Income Tax: determination of income; receipts versus earnings (TR 98/1) lists a number of factors that are useful in determining whether the receipts (cash) basis method or the earnings (accruals) method is the appropriate method. The factors include whether the entity is a corporate entity, whether the income is trading income, the size of the business, whether the entity relies on circulating capital or consumables to produce income, whether the entity relies on capital items such as plant and machinery to produce income, whether the entity readily gives credit and what method was used in the books of account.
In the present case, you are a trust with a modest turnover, have no employees, and supply the services of one associated person to an associated entity.
In these circumstances, in particular, having regard to the modest turnover, the limited nature of the activities and the fact that the business conducted involves one person's professional services being provided, it is considered that the 'substantially correct reflex' of income is derived by adopting the receipts (cash) method of accounting.
Accordingly, you must adopt the receipts (cash) method.
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