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Edited version of your written advice
Authorisation Number: 1012818303572
Ruling
Subject: Assessable Income
Question 1
Are you required to declare income which has been invoiced but not received under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period(s)
Year ended 30 June 2014
The scheme commences on
1 July 2013
Relevant facts and circumstances
You sign up clients to an X months advertising service.
You invoice each client for an X months' worth of services which is then paid in monthly instalments.
You report your income on an accruals basis.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 6-5
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that your assessable income includes income according to ordinary concepts. It is an accepted principle of income tax law that the method which a taxpayer accounts for its business for purposes of income tax must `give a substantially correct reflex of the taxpayer's true income' (see Dixon J in The Commissioner of Taxes (South Australia) v. The Executor Trustee and Agency Company of South Australia (1938) 63 CLR 108 at 154; (1938) 5 ATD 98 at 131 (Carden's case).
Taxation Ruling TR 98/1 sets out the Commissioner's guidelines on the earnings method for the treatment of income as follows: Under the `earnings' method, income is derived when it is earned. The point of derivation occurs when a `recoverable debt' is created. The term `recoverable debt' is used to describe the point of time at which a taxpayer is legally entitled to an ascertainable amount as the result of having performed an agreed task.
Whether there is, in law, a recoverable debt is a question to be determined by reference to the contractual agreements that give rise to the legal entitlement to payment, the general law, and any relevant statutory provisions.
Taxation Ruling 97/15 considers when income is derived under section 6-5 of the ITAA 1997 by the seller of goods under a conditional contract. As outlined in this ruling the Commissioner considers that income from the sale of goods under a conditional contract, which is assessable to the seller on an accruals basis, is derived under section 6-5 of the ITAA 1997 when a debt for the sale of those goods is created under the contract of sale.
In this case, you enter into a contract with your clients. As you are on an accruals basis, the income is derived when a debt is created under the contract of sale. Therefore, you are required to declare the income when it is invoiced.