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Ruling

Subject: Income - derivation

Question:

Is the payment you received from Company X assessable in the year ended 30 June 2012?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You operate a business.

During the 2011-12 financial year you negotiated with Company X to provide cash sponsorship in respect of your business.

Under the Memorandum of Understanding between yourself and Company X:

· Company X paid you a defined amount during the 2011-12 financial year

· the payment represented sponsorship for 12 months

· you receive a portion of the total paid for your work

· the remaining funds are to be paid to contributors to the business.

· You account for your business income using the cash receipts basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

The taxable income of a taxpayer is calculated as:

· their assessable income less expenses incurred in earning that income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes ordinary income derived 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.

As the payment you received from Company X relates to carrying on your business the full amount is assessable under section 6-5 of the ITAA 1997 as ordinary income. The fact that the majority of payment will be distributed to contributors in the future does not affect the amount to be declared as assessable income.

Derivation of income

Under section 6-5 of the ITAA 1997 income is assessable in the income period in which it is derived.

The courts have recognised two methods by which a taxpayer may derive income.

Under the cash receipts method a taxpayer is taken to have derived only those amounts which they have received during the year. The fact that the taxpayer may receive a payment in advance and is yet to earn any fees is not relevant under this method.

Under the accrual method a taxpayer derives income when they have earned the right to payment, that is, when the amount is receivable or recoverable. This can be either when the work has been completed, or when a client is billed for work performed. Under the accruals method, the time of the actual receipt of money is of no relevance.

As you operate your business and return income using the cash receipts method, the full payment you received from Company X is assessable in the financial year it was received. This is regardless of the fact that the payment relates to services to be provided during the following financial year.