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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private advice

Authorisation Number: 1012636761152

Ruling

Subject: Business income

Question 1

Are the fees assessable at the time the clients deposit instalment payments into the client account?

Answer

No

Question 2

Are the fees assessable at the time an invoice is provided to the client and the fees are transferred to the operating account?

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

The company provides consultancy services.

The company has X bank accounts for its business.

The operating account is used for normal business operating expenses.

When taking on a new client, the company prepares a service contract and agreement for the client. The service contract details the total consulting fees that will be charged to the client (not including extra costs or government fees).

The service contract states that clients will make instalment payments of their fees according to certain milestones. Anticipated government fees, such as application fees, are included in the agreed instalment amounts.

Any instalment payments made by clients are deposited into to the client account. Any government fees, such as application fees, are paid from the client account on the clients' behalf.

Once a client's case is finalised, the company will raise an invoice to the client and transfer the fees from the client account to the operating account.

If a client's case is unsuccessful, they are not entitled to a refund.

In accordance with the service contract, if a client wishes to withdraw their application prior to it being finalised, any payments they have made in relation to the consultancy fees are to be refunded to the client less a fee determined on the basis of the time the company has spent on that client's case.

In the case of a withdrawal, the company will raise a tax invoice to the client and transfer the applicable fees from the cash management call account to the business cheque account before refunding the remaining monies to the client.

The company operates on a cash basis for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

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

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.

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.

In this case, when the clients deposit their instalment payments into the client account, the company is effectively holding the clients' money on trust to be used for the purposes directed by the clients. The company is not the beneficial owner of the money until such point in time when the work has been completed (or the application withdrawn) and the company invoices the client for the relevant amount.

Accordingly, the company does not 'derive' the income until the invoice for the relevant client has been issued allowing for the amount to be transferred from the client account to the operating account. Fees will be assessable at this point in time.