ATO Interpretative Decision
ATO ID 2001/230 (Withdrawn)
Income Tax
PrepaymentsFOI status: may be released
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The principle addressed in this ATO ID is adequately covered by other precedential documents, for example TR 93/11; TR 92/5.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Whether prepayments of income retained by the taxpayer on sale of a business are income or capital?
Decision
The prepayments (at the date of sale of the taxpayer's business) are income.
Facts
The taxpayer sells a business in accordance with an agreement for sale. Until the date of sale prepayments received by the business are brought to account at the time the goods or services that the prepayments relate to are delivered.
Reasons for Decision
Prepayments are advance amounts which are brought to account as income in the taxpayer's accounts only when earned (Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 315). That is, the income is said to have been earned at the time the goods or services that the prepayments relate to have been delivered, for it is at this time that the seller's obligations have been fulfilled.
Under the terms of the agreement the taxpayer's obligations to customers will be fulfilled on sale of the business. Thus, prepayments of income outstanding at this time and retained by the taxpayer will acquire the character of income.
Date of decision: 10 July 2001
Legislative References:
Income Tax Assessment Act 1997
section 6-1
Case References:
Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation
(1965) 114 CLR 314
Related Public Rulings (including Determinations)
TR 96/5
Keywords
Business Income
Accrual basis accounting
ISSN: 1445-2782
| Date: | Version: | |
| 10 July 2001 | Original statement | |
| You are here | 30 July 2010 | Archived |