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Edited version of your written advice
Authorisation Number: 1051460149405
Date of advice: 28 November 2018
Ruling
Subject: Work in Progress
Question
Is the asset acquired by the company classified as ‘Receivables’ within the Business Sale Deed a ‘work in progress amount’ (WIP) for the purposes of section 25-95 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following periods:
The years ended 30 June 20XX and 30 June 20XX
The scheme commences on:
15 August 20XX
Relevant facts and circumstances
The company acquired an asset which has been classified as ‘Receivables’ within the Business Sale Deed from the Vendor.
Under the Business Sale Deed, when read together, the Receivables has been identified as being in respect of work that has been partially performed by the Vendor for a third party, but not yet completed to the stage where a recoverable debt has arisen in respect of that work.
A copy of the Business Sale Deed has been provided in this ruling application.
Relevant legislative provisions
Income Tax Assessment Act 1997 (ITAA 1997)
● Section 15-50
● Section 25-95
● Section 995-1
Reasons for decision
The words, “work in progress”, are defined under section 25-95. Paragraphs 25-95(3)(a) and (b) provide that:
(3) An amount is a work in progress amount to the extent that:
(a) an entity agrees to pay the amount to another entity (the recipient ); and
(b) the amount can be identified as being in respect of work (but not goods) that has been partially performed by the recipient for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work.
The fundamental requirements for an amount to be deductible under paragraphs 25-95(3) (a) and (b) are that an entity agrees to pay the amount to another entity, and that the amount can be identified as being in respect of work (but not goods) that has been partially performed by the recipient for a third entity, but not yet completed to the stage where a recoverable debt has arisen in respect of that work.
The words, “in respect of work”, are not defined in the legislation. Paragraph 2.17 of Chapter 2 to the Explanatory Memorandum of the Taxation Laws Amendment Bill (no.5) 2002 provides that, a work in progress amount may be able to be identified by looking to all the surrounding circumstances, including working documents or accounts demonstrating how the amount was calculated.
After examining the surrounding circumstances of the company’s acquisition, including documents which have been provided as part of this private ruling application, the Commissioner is satisfied that the asset “Receivables” can be identified as being in respect of work that has been partially performed by the Vendor for a third party, but not yet completed to the stage where a recoverable debt has arisen in respect of that work. Therefore, it is a work in progress amount for the purposes of section 25-95.
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