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Edited version of your written advice
Authorisation Number: 1051367564759
Date of advice: 1 May 2018
Ruling
Subject: Business income
Question and Answer
Are you assessable in the year you derive your success fees where, if the grant is denied at a later time you are required to repay the fee?
Yes
This ruling applies for the following periods
1 July 2012 to 30 June 2013
1 July 2013 to 30 June 2014
1 July 2014 to 30 June 2015
1 July 2015 to 30 June 2016
1 July 2016 to 30 June 2017
1 July 2017 to 30 June 2018
1 July 2018 to 30 June 2019
The scheme commences on
1 July 2012
Relevant facts and circumstances
You are a consultant who works on a success fee basis.
You are running a seminar/teaching services.
You receive your fee when your client receives their incentive.
Your clients may be reviewed at a later time, it may be decided that your clients were not entitled to the incentive. Your client then is required to repay any incentive payments.
If the incentive is repaid, you are required to repay your client.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Further issues for you to consider
Where income is derived and included in assessable in one income year but is later repaid, there are two possible outcomes:
1. The entity is entitled to amend their assessment to remove the income, only after it is repaid (for this purpose the amendment period is unlimited); or
2. The entity is entitled to a deduction for the repayment in the year of the repayment.
The repayment will be deductible in a business situation as the repayment is necessarily incurred in carrying on the business for the purpose of gaining or producing assessable income.
Reasons for decision
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that where you are an Australian resident for taxation purposes, your assessable income includes income you derive from all sources, whether in or out of Australia during the income year.
In working out whether you have derived an amount of 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.
Taxation Ruling TR 98/1 Income Tax: determination of income; receipts versus earnings discusses when income is derived. Under the receipts or cash method income is derived when it is received, either actually or constructively. Under the earnings or accruals method income is derived when it is earned. The point of derivation occurs when a ‘recoverable debt’ is created.
The receipts method is appropriate to determine:
● income derived by an employee;
● non-business income derived from the provision of knowledge or exercise of skill possessed by the taxpayer; and
● business income where the income is derived from the provision of knowledge or the exercise of skill possessed by the taxpayer in the provision of services (with some exclusions).
The earnings method is, in most cases, appropriate to determine business income derived from a trading or manufacturing business.
In your case, the service fee is therefore either derived when the cash is received or when you invoice for the services.