Work in progress - timing of inclusion in assessable income.

Is a taxpayer assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) on an amount representing the value of work in progress where there is no entitlement to payment until after completion of a project?

No. A taxpayer is not assessable under section 6-5 of the ITAA 1997 on an amount representing the value of work in progress where there is no entitlement to payment until after completion of a project.

The taxpayer tenders for projects and is given a purchase order when successful.

The purchase order states that an invoice can only be sent after the services have been completed.

The length of projects varies between a few days up to 4 months.

There are no progress payments and the taxpayer is only entitled to receive payment once the projects are completed.

The taxpayer returns their income on an accruals basis.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

The issue is whether the value of the work in progress is income that has been derived by the taxpayer.

In Henderson v. Federal Commissioner of Taxation (1970) 119 CLR 612; 70 ATC 4016; (1970) 1 ATR 596 Windeyer J stated: 'Nevertheless, I think that services rendered for fees do not result in income derived within the meaning of the Act until the fees are either paid or payable. This, of course, may be before an account for payment is rendered.... But when a professional man is, according to the terms of his engagement, not to be paid until his task is completed, I do not think he can be said to have earned anything by that task until then.'

This view is accepted by the Commissioner in Taxation Ruling IT 2450 and Taxation Determination TD 94/39 in relation to long-term construction contracts. Paragraph 5 of TD 94/39 states: 'However, where a taxpayer enters into an arm's length contract under which the taxpayer is not entitled to receive any payment until completion of the contract, the income from that contract is not derived in terms of section 25(1) of the Income Tax Assessment Act 1936 until the year in which the contract is completed: see H.W. Coyle Limited v. C of IR (NZ) 80 ATC 6012 per Holland J. at 6022...'

The principles set out in the above mentioned cases reflect the law as it applies generally to taxpayers returning their income on an accruals basis.

The taxpayer has entered into arm's length transactions which allow an invoice to be presented only after completion of a project.

As such, no amount is included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 until the completion of the specific project.