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Edited version of your private ruling
Authorisation Number: 1012582729931
Ruling
Subject: Assessable income - timing
Question
Will the income that you received in the 2013-14 financial year be included in your assessable income for the 2012-13 financial year?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts and circumstances
For income tax purposes, you have always accounted for your income on a cash receipts basis as it has generally been the case that fee payments were received promptly upon accounts raised.
You suffered severe health issues. It became apparent that you would not be able to continue your activities due to your ill health.
You proceeded to phase down your activities in the relevant financial year.
Your last major job was completed in the relevant financial year and invoices were raised. You retired from your work effective 30 June 20XX, undertaking only unsubstantial 'carry over' commitments after this date.
You expected fees from the above job would be paid promptly in line with previous engagements. However, there was an extraordinary delay with the collection of those fees which eventually required external intervention. The fees were received in the subsequent financial year.
Reasons for decision
Under subsection 6-5(2) of the ITAA 1997 a taxpayer's assessable income will include ordinary income derived during the income year.
Taxation Ruling TR 98/1 provides guidance on determining income and the use of the receipts (cash) versus earnings (accruals) methods of accounting.
The method to be adopted is the method that gives a substantially correct reflex of the taxpayer's income (The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia Ltd (1938) 63 CLR 108; (1938) 5 ATD 98).
The Commissioner has indicated in TR 98/1, based on Barratt & Others v. Federal Commissioner of Taxation (1992) 36 FCR 222; (1992) 23 ATR 339; 92 ATC 4275, that the point at which income is earned is generally when a recoverable debt comes into existence and this may occur before the point at which the taxpayer can legally enforce recoverability of the debt. All that is required is that there must be a present right to receive a quantified amount without the presence of any element of contingency or defeasibility.
When deciding which method of accounting provides a substantially correct reflex of income, it is necessary to weigh the total circumstances of the taxpayer and the income.
Having consideration to your circumstances, including the fact that you effectively retired from your work in the relevant financial year, we consider that the earnings method would provide the most correct reflex of income in the relevant financial year. Accordingly, the income will be included in your assessable income for the relevant income year.