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Ruling

Subject: Long term construction projects

Question 1

Is your subcontract a 'long term construction contract' for the purpose of the recognition of assessable income and allowable deductions when calculating taxable income under section 4-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you utilise the 'estimated profits basis' in respect of your subcontract and similar contracts entered into on or after 1 July 2011, for determining taxable income under section 4-15 of the ITAA 1997?

Answer

Yes.

Question 3

If the answer to question 2 is 'Yes', is your method of accounting for long term construction contracts consistent with the 'estimated profits basis' method outlined in IT 2450 for the purpose of determining taxable income under section 4-15 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commences on:

1 July 2011.

Relevant facts and circumstances

You are an Australian proprietary company, where you and your subsidiary entities are referred to as the Group.

You have a majority interest in each of the subsidiary entities of the Group. A number of subsidiaries have minority interests held by the subsidiaries' management teams and senior employees, to encourage efficient and profitable trading.

You have not elected to form a tax consolidated group.

Group businesses

The Group supplies and installs systems as a component of large construction projects or as discrete projects for commercial and industrial clients.

In relation to subcontracting arrangements, the Group entities supply and install the systems which form an integral part of an overall project managed by the head contractor. The systems provided are integral and interdependent with other systems, structures and assets within an overall building, and enable various other assets within the overall building to function for the purposes of which they are designed.

To complete its subcontracting arrangements, the Group may further subcontract and engage the assistance of smaller contractors to fulfil its obligations under the contract.

Entities within the Group do not hold any trading stock and purchase all job specific equipment for installation as and when required.

Group contracts

Group entities enter into contracts for the supply and installation of systems that are integral and interdependent with other systems structures and assets.

These systems may be installed in the construction of a new building or in the course of the significant refurbishment of an existing building.

The Group entities normally perform their contractual obligations in consideration for a fixed fee. The relevant Group entity submits applications for progress invoices throughout the project to the head contractor or customer on the basis of the percentage of work complete. Generally, once the head contractor or customer agrees to the schedule provided by the Group entity, an invoice is issued and the Group entity becomes entitled to payment.

The Group may also enter into maintenance contracts for the systems installed after the defect liability period is over. Those maintenance contracts are considered not to be construction contracts, with income recognised as assessable when derived and outgoings deductible when incurred.

The Group's contracts relating exclusively to the provision of goods or services are considered not to be long term constructions contracts, with income properly recognised as assessable when derived and outgoings deductible when incurred.

You have provided an example subcontract, which is materially representative of all contracts entered into by Group entities and for which you seek to adopt the estimated profits basis of income recognition.

Accounting policy and practices

The Group applies consistent accounting and tax treatments across all the entities, with finance functions (including accounting and tax) performed by the same team.

In the notes to your special purpose financial report, you state that 'The financial report has been prepared in accordance with mandatory Australian Accounting Standards applicable to entities reporting under the Corporations Act 2001…'.

The directors also make a declaration that, among other things, the financial statements and notes comply with Australian Accounting Standards and the Corporations Regulations 2001.

The notes to your financial statements also states that 'The financial statements have been prepared on 'an accruals basis and are based on historical costs unless otherwise stated in the notes' and lists significant accounting policies applied in the preparation of the financial statements.

The notes to your financial statements states 'Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract'.

The auditor has conducted the audit of your financial report, with unqualified audit opinions provided in each year for all entities.

The auditor expresses their opinion that, among other things, that the financial report complies with Australian Accounting Standards to the extent described in the notes to the financial statements and the Corporations Regulations 2001.

Accounting treatment of long term construction contracts

For the purposes of producing your financial reports, you utilise the percentage of completion method in accordance with Australian Accounting Standards Board (AASB) accounting standard 'AASB 111 Construction contracts'.

You calculates the percentage of completion by dividing the actual costs incurred at month end by the total forecasted costs.

You calculate the profit on a contract for accounting purposes by applying the percentage of completion to the difference between the estimated total revenue from the project and the estimated total costs for the project.

Any difference between the amount recorded as profit under the percentage of completion method and actual claims and actual costs is recorded as work in progress (WIP) or unearned revenue for accounting purposes.

Tax treatment of long term construction contracts

Up to the income year ended 30 June 2011 the Group has applied the 'basic approach', as outlined in Taxation Ruling IT 2450, in calculating assessable income from long term construction contracts.

You will continue to utilise the basic approach for existing long term construction contracts on hand as at 1 July 2011 to which the basic approach has previously been applied.

However, due to growth of the business, you no longer consider that the basic approach correctly reflects the true economic gain or loss on contracts at each year end. In addition, there are increased costs of compliance due to the additional analysis required for tax purposes, as well as the unnecessary recognition of deferred taxes on the balance sheet.

You will utilise the 'estimated profits basis', as outlined in IT 2450, in calculating taxable income from long term construction contracts entered into on or after 1 July 2011.

You will use the same percentage of completion method used for the preparation of your financial statements to determine the ultimate profit from each of your long term construction contracts to be included in your taxable income for an income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 4-15

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-5(3)

Income Tax Assessment Act 1997 Subsection 6-5(4)

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 8-1(1)

Income Tax Assessment Act 1997 Subsection 8-1(2).

Issue 1

General discussion of the law

Section 4-15 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out how to work out your taxable income for an income year. This section provides that your taxable income is the product of your assessable income less your allowable deductions. In the event that your allowable deductions equal or exceed your assessable income, you do not have a taxable income.

Section 6-5 of the ITAA 1997 discusses income according to ordinary concepts. Where, subsection 6-5(1) of the ITAA 1997 states that 'Your assessable income includes income according to ordinary concepts, which is called ordinary income'.

The meaning of derived

Subsection 6-5(2) of the ITAA 1997 provides:

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.

Subsection 6-5(4) of the ITAA 1997 provides:

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.

Therefore, an amount (including an amount which has been received), will not be included in assessable income for an income year, unless it has been derived during that year.

Apart from subsection 6-5(4) of the ITAA 1997, there is no further legislative guidance as to the timing of income derivation. As such, we will now consider the application of case law and taxation rulings to your situation.

In Brent v. FC of T (1971) 125 CLR 418; (1971) 71 ATC 4195; (1971) 2 ATR 563, the High Court said at CLR 428; ATC 4200; ATR 570:

It has become well established that unless the Act makes some specific provision on the point the amount of income derived is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which is calculated to give a substantially correct reflex of the taxpayers true income (The Commissioner of Taxes (South Australia) v The Executor, Trustee and Agency Company of South Australia Limited (Cardens case) (1938) 63 CLR 108; 1 AITR 416; (1938) 5 ATD 98).

In Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612, (1969) 15 ATD 298; 69 ATC 4049 (the Henderson Case) Windeyer J said:

.. I think that services rendered for fees do not result in income derived ... until the fees are either paid or payable. This, of course, may be before an account for payment is rendered. For example, a physician may be entitled in law to be paid for attendances upon his patient before his treatment of him for his illness has been completed and he has sent him a bill. What he is thus entitled to be paid forms part of his income calculated in an earnings basis ... for work done ...Money is not, I think, earned income until it is in law recoverable as a debt ...'

His honour continues:

services may create debts before a bill is sent to the debtor. But services rendered do not produce taxable income until they create a debt.

On appeal from the Henderson Case, Barwick CJ extended that a recoverable debt should be included as earnings when:

the service is so far performed that according to the agreement of the parties or in default thereof, according to the general law, a fee or fees have been earned, then it or they will be income derived in the period of time in which it or they have become recoverable.

Barwick CJ clarified the meaning of recoverable later in his judgement as 'the point at which income is derived by the performance of services'.

In Barrett & Ors v FTC 92 ATC 4275 (Barrett's case), Gummow J. said:

No doubt a debt that is presently recoverable by action generally will be an amount "derived" in the relevant sense by the creditor. The creditor will have a present right to receive the amount in question, something both earned and quantified, without the presence of any element of contingency or defeasibility. At the other end of the scale, where the right of the taxpayer is contingent, there will be no derivation before the contingency is satisfied'. Nor will there be derivation if the debt is yet to be quantified ...'

At paragraph 11 in Taxation Ruling TR 98/1 Income Tax: Determination of Income; Receipts versus Earnings, the Commissioner states that whether there is, in law, a recoverable debt is a question to be determined by reference to the contractual arrangements that give rise to the legal entitlement to payment, the general law and any relevant statutory provisions.

In order to determine when the amounts in question were derived as income it is necessary to apply the legal principles of derivation provided in common law and the Commissioner views expressed in various rulings to the terms of the contracts relating to each amount respectively.

The meaning of incurred

Section 8-1 of the ITAA 1997 deals with general deductions, where subsection 8-1(1) of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

However, subsection 8-1(2) of the ITAA 1997 provides that you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income or your *non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

The meaning of 'incurred' is not a defined term. The courts have considered the meaning of 'incurred' in relation to various cases, however have not defined the term.

The Commissioner has considered various court cases that have addressed the meaning of 'incurred' and set out his view in relation to whether an amount is incurred for the purposes of section 8-1 of the ITAA 1997 in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions.

In TR 97/7 we use the courts propositions to help outline the scope of defining a loss or outgoing as being incurred. Paragraph 6 of TR 97/7 lists some general rules, which have been provided by the courts, to assist in determining whether a loss or outgoing has been incurred. Those rules include:

(a) taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;

(b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others;

(c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities);

(d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise;

(e) in the case of a payment made in the absence of a presently existing liability(where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid.

Long term construction contracts

The preamble of Taxation Ruling IT 2450 introduces its existence as being the result of representations made to the Australian Taxation Office (ATO) by taxpayers engaged in long term construction projects, following income tax audits of a number of companies engaged in such activity.

Central to these representations is the basis of returning income derived under long term construction projects. The representations allege inconsistent treatment across ATO sites, i.e. a method of returning income accepted in one site has been specifically rejected in another.

At the time, the ATO was concerned about the way income from long term construction contracts had been returned by a number of taxpayers in the construction industry and sought direction in the matter.

IT 2450 restates the principles and practices which are to apply in bringing to account for income tax purposes income derived from long term construction contracts.

IT 2450 defines that long term construction contracts are contracts relating to construction work where construction extends beyond a year of income. This was consistent with the definition of 'construction contract' in the former Statement of Accounting Standards - Accounting for Construction Contracts - Australian Accounting Standard 'AAS 11 Construction Contracts'. Australian Accounting Standards Board (AASB) accounting standard AASB 1009 is the equivalent standard for corporations that are required to prepare financial statements in accordance with Part 3.6 of the Corporations Law and that meet certain criteria.

AAS 11 has been replaced by accounting standard 'AASB 111 Construction Contracts', which was released in July 2004. The AASB has since compiled this standard as an Australian Equivalent to the International Accounting Standards Board (IASB) accounting standard lAS 11.

Generally AASB 111, as amended, applies to annual reporting periods that begin on or after 1 January 2009 that end on or after 30 June 2009. However certain conditions outline the application of this standard to income periods ending prior to 1 January 2009.

It is noted that certain content of AAS 11 has changed in translation to AASB 111, in particular the omission of certain words from the definition of 'construction contract'. However, the words omitted are considered to have no material impact upon the outcome of this ruling, which relates to the income period beginning 1 July 2011.

Paragraph 24 of IT 2450 provides clarification of the relationship between accounting standards and income tax law:

It is now well established that accounting standards and practices cannot supplant the terms of the income tax law which must be considered in determining whether income tax deductions are allowable. It is equally well established that the income tax law does not permit income tax deductions for claims for costs or losses which may be expected to arise in performance of long term construction contracts. It is only losses and outgoings which are incurred during a year of income which may be allowed as income tax deductions.

Paragraph 13 of IT 2450 states that whichever of the acceptable methods of determining taxable income from long term construction contracts is adopted by a taxpayer it is to be applied consistently to all years during which the particular contract runs and to all similar contracts entered into by the taxpayer.

Paragraph 14 of IT 2450 provides that the selected method is to apply in respect of all long term construction contracts entered into after 1 July 1987. However, where taxpayers have been determining taxable income from existing contracts on differing acceptable methods - this practice may continue until those contracts are complete.

Eligibility as long term construction contracts

IT 2450 provides guidance on the taxation treatment of income from long term construction contracts. The nature of long term construction contracts covered by the ruling is described in paragraph 11 of IT 2450 as:

Long term construction contracts are contracts relating to construction work where construction extends beyond a year of income. This is in accord with the definition of 'construction contract' in the Statement of Accounting Standards - Accounting for Construction Contracts - AAS 11 - issued by the accounting profession. The word 'construction' is used in its normal accepted sense. Income from long term construction contracts would include: income from construction of buildings, bridges, dams, pipelines, tunnels and other civil engineering projects; income from related activities such as demolition, dredging, heavy earth moving projects, etc.; and income from the construction of major plant items including ships and transport vessels. It would also include income from similar contracts in associated fields, e.g. air conditioning contracts, major electrical wiring or rewiring contracts, major refurbishment of hotels, stores, etc., major construction management contracts, etc…

AASB 111 is the current equivalent of AAS 11 referred to in IT 2450.

The meaning of the term 'construction contract' in IT 2450 appears to be equivalent to the principles underlying AASB 111, such that you may apply the ruling on the same basis that you apply the accounting standard.

In particular, IT 2450 refers to:

…income from similar contracts in associated fields, e.g. air conditioning contracts, major electrical wiring or rewiring contracts, major refurbishment of hotels, stores, etc., major construction management contracts…

This is considered similar to paragraph 5 of AASB 111 which extends the definition to '…contracts for the rendering of services which are directly related to the construction of the asset for example, those for the services of project managers and architects…'

Paragraph 3 of AASB 111 Construction Contracts defines a 'construction contract' as:

… a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.

Paragraph 4 of AASB 111 states:

A construction contract may be negotiated for the construction of a single asset such as a bridge, building, dam, pipeline, road, ship or tunnel. A construction contract may also deal with the construction of a number of assets which are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use; examples of such contracts include those for the construction of refineries and other complex pieces of plant or equipment.

For the purposes of AASB 111, section 5 provides that construction contracts include:

(a) contracts for the rendering of services which are directly related to the construction of the asset, for example, those for the services of project managers and architects; and

(b) contracts for the destruction or restoration of assets, and the restoration of the environment following the demolition of assets.

Recognition of long term construction income

IT 2450 states that there are two acceptable methods for recognising income from long term construction contracts, these are as follows.

The basic approach

Paragraph 15 of IT2450 describes the 'Basic Approach' as follows:

As stated in CM 639 the basic approach is that all progress and final payments received in a year should be included in assessable income and income tax deductions allowed for losses and outgoings to the extent permitted by the income tax law. The approach seeks to treat taxpayers engaged in the long term construction industry in the same manner as any other taxpayer in business.

In practice, construction income is brought to account under the ordinary 'derivation' rules, which apply to all taxpayers. Under this method, the general rule is that all progress and final payments billed during a particular year of income are required to be brought to account as income.

Similarly, tax deductions are allowed for losses or outgoings when they are incurred (i.e. where a present liability exists) for tax purposes.

IT 2450 provides further commentary in relation to derivation of income under the 'Basic Approach' at paragraph 16:

…The reasoning of the High Court in Henderson v. FCT, 70 ATC 4016; 1 ATR 596 makes in absolutely clear that assessable income arising from long term construction contracts includes not only progress and final payments actually received in a year but also amounts billed or entitled to be billed to customers in a year for work carried out and certified as acceptable for payment by the appropriate architect, engineer, surveyor or other person authorised in the contract for that purpose…

The estimated profits basis

Paragraph 25 of IT 2450 describes that the estimated profits basis permits a taxpayer to spread the 'ultimate profit or loss' on a long term construction project over the years taken to complete the contract provided the basis is reasonable and is in accordance with accepted accountancy practices.

Paragraph 26 of IT 2450 discusses the meaning of 'ultimate profit or loss' and provides that it refers to the overall taxable income expected to arise from a particular contract. In particular, it requires the total receipts expected to be received under the contract to be regarded as assessable income and income tax deductions to be allowed for expected losses and outgoings to the extent permitted by the income tax law on the assumption that the losses and outgoings would actually be incurred over the period of the contract.

Ultimate profit or loss is in effect notional taxable income expected to arise under a particular contract and it is the notional taxable income which may be spread over the years taken to complete the contract.

Paragraph 31 of IT 2450 discusses the acceptable methods of allocating notional taxable income over the years taken to complete a long term construction contract. In particular, that the method to be used is dependant on the nature of the contract. Further, that:

In a cost plus contract, i.e. a contract where the contractor is to be paid for agreed cost plus a percentage or fixed fee, the amount of notional taxable income to be included in assessable income in each year will be determined by ascertaining the percentage that notional taxable income bears to agreed cost and applying the percentage to costs incurred in a year.

Paragraph 32 of IT 2450 provides the following methods, as provided by paragraph 11 of AAS 11, that the Commissioner accepts as appropriate in determining notional taxable income:

(a) physical estimates or surveys by engineers and architects of the work performed to date;

(b) the cost basis - calculating the proportion that costs incurred in each year bear to the estimated total costs of the contract;

(c) the billings basis - calculating the proportion that billings or entitlement to billings in each year bears to total billings.

The Commissioner is prepared to accept any other method that achieves the same broad result as long as the method is applied consistently.

Other considerations in applying the estimated profits basis

Taxation Determination TD 94/65 discusses whether a 'management reserve' can be taken into account when calculating notional taxable income under the estimated profits basis of returning income from long term construction contracts.

TD 94/65 provides that only actual costs that are identified as likely to be incurred over the period of the contract and which are properly deductible are taken into account in calculating notional taxable income.

Further, costs of materials and labour are examples of properly deductible costs. However, general claims for a 'management reserve' or for 'additional costs arising from wet weather, industrial disputes, etc.' are not sufficiently informative about the actual costs involved to be properly deductible.

It is not sufficient to make a general claim for unspecified costs likely to arise on the happening of some future event. The calculation of notional taxable income needs to be more exact. The likely effect those future events will have on actual deductible costs must be quantified.

IT 2450 states at paragraph 27, that it is permissible to take into account a reasonable amount for probable costs in remedying defects during the maintenance period.

Taxation Determination TD 94/87 discusses how an estimated 'ultimate loss' arising under a contract is to be recognised, where the estimated profits method of recognising income from long-term construction contracts is adopted in accordance with IT 2450.

TD 94/87 provides that the estimated contract loss is to be spread over the period taken to complete the contract in a manner that reflects the progress of the contract. This is consistent with the basic principle of income tax law that the liability to income tax is an annual event, and therefore only income and losses that have been derived or incurred in an income year are brought to account.

Consistency of method

Paragraph 13 of IT 2450 states that whichever of the methods is adopted by the taxpayer it must be applied on a consistent basis to 'all years during which the particular contract runs and to all similar contracts entered into by the taxpayer'. In addition, it is also stated that 'taxpayers who are companies in the one group should adopt the same method of determining taxable income'.

Paragraph 14 of IT 2450 allows that where taxable income of existing contracts has been determined using a different acceptable method, the taxable income of those contracts may continue to be calculated using that method until the completion of the respective contract.

Question 1

Detailed reasoning

You enter into contracts that span two or more income years. For accounting purposes, you recognise profit from these contracts in accordance with accounting standard AASB 111.

As is stated in paragraph 24 of IT 2450 accounting standards and practices cannot supplant the terms of the income tax law which must be considered in determining whether income tax deductions are allowable. In addition, that the income tax law does not permit income tax deductions for claims for costs or losses which may be expected to arise in performance of long term construction contracts. Further, it is only losses and outgoings which are incurred during a year of income which may be allowed as income tax deductions.

Therefore, your application of AASB 111 in your financial statements does not necessarily indicate that the same method can be applied in calculating your taxable income. In order to apply methods within that standard for the calculation of taxable income, it must be demonstrated that your contracts are in fact 'long term construction contracts' according to the principles set out in IT 2450.

You have provided the subcontract as an example that is materially representative of your contracts. The term of the subcontract spans over two income years.

The subcontract is for the supply and installation of various systems in relation to the construction of a building. You are also required to provide certain services directly related to performing your obligations under the subcontract.

Other contracts you enter into involve the supply and installation of similar systems in relation to the construction, or major refurbishment, of a building.

The Commissioner considers that the subcontract and other contracts you enter into are similar contracts in associated fields as described in paragraph 11 of IT 2450.

In consideration of your circumstances in relation to paragraph 11 of IT 2450, activity under the subcontract relates to supply and installation of equipment and systems that are integral to the successful operation of particular assets for the purpose which they are employed, therefore they are integral to the construction of the major asset, in your circumstances a building.

Further, the activities you are performing under the subcontract do not appear to be sales and supply over time of what would ordinarily be ordinarily regarded as trading stock. Where you otherwise enter into contracts for sale and supply of goods or services, and contracts that do not extend beyond an income year, you do not treat those contracts as construction contracts. Therefore paragraph 12 would not act to exclude the subcontract from the application of IT 2450 in determining your taxable income.

Therefore, it is considered that the subcontract and similar contracts involving the supply and installation of systems in relation to the construction, or major refurbishment, of a building, where the contract extends beyond a year of income, constitute long term construction contracts for the purposes of IT 2450.

Question 2

Detailed reasoning

The Commissioner has formed the view in Question 2 that your subcontract and similar contracts are long term construction contracts.

Accordingly, you may apply Taxation Ruling IT 2450 when determining your taxable income and are eligible to apply either the 'basic approach' or the 'estimated profits basis'.

IT 2450 discusses the requirement for consistent application of these methods. In particular, paragraph 13 of IT 2450 states that whichever of the methods is adopted by the taxpayer it must be applied on a consistent basis to 'all years during which the particular contract runs and to all similar contracts entered into by the taxpayer'. In addition, it is also stated that 'taxpayers who are companies in the one group should adopt the same method of determining taxable income'.

Paragraph 14 of IT 2450 allows that where taxable income of existing contracts has been determined using a different acceptable method, the taxable income of those contracts may continue to be calculated using that method until the completion of the respective contract.

IT 2450 does not prohibit changing methods of determining taxable income, merely that the application of a method must be made consistently between like contracts and consistently over the life of those contracts.

In the practical application of this view, where it is more appropriate to use a particular method to determine taxable income that is different to the method previously applied, any change must be applied consistently to new contracts entered into within a given income year. You can not apply a different method to existing contracts.

Therefore, you may adopt the 'estimated profits basis' in respect of the subcontract and similar contracts, entered into on or after 1 July 2011, for determining taxable income under section 4-15 of the ITAA 1997.

Question 3

Detailed reasoning

Your accounting policy and practices involve calculating the percentage of completion on the basis of costs incurred in respect of each construction contract for an income year in accordance with methods prescribed in AASB 111.

The Commissioner states in IT 2450 that the methods of calculating taxable income set out in AAS 11 is an acceptable method and any other method which achieves the same broad result would also be acceptable. AASB 111 prescribes the same methods as those formerly prescribed in AAS 11.

Therefore, your method of accounting for long term construction contracts is consistent with the 'estimated profits basis' method outlined in IT 2450 for the purpose of determining taxable income under section 4-15 of the ITAA 1997.

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