Assessability of work in progress amount: transfer of work in progress to a company

Is the market value of the work in progress transferred from a partnership to a company regarded as a 'work in progress amount' for the purposes of subsection 25-95(3) of the Income Tax Assessment Act 1997 (ITAA 1997) where the partners receive shares in the company as consideration?

Yes. The market value of the work in progress transferred to the company is regarded as a 'work in progress amount' for the purposes of subsection 25-95(3) of the ITAA 1997.

The taxpayer is a partner in a partnership. The taxpayer and the other partners of the partnership decided to transfer their partnership business to a company.

For that purpose a new company was formed and the partnership business was sold to that company. As consideration for the sale, the partners received shares in the company.

At the time of the transfer the assets of the partnership included work in progress. The work in progress was the value of uncompleted work for which no account had been rendered as at the time of the sale.

The contract for the sale of the business provided no apportionment between the value of work in progress and the other assets.

Section 15-50 of the ITAA 1997 provides that assessable income will include a 'work in progress amount' received by the taxpayer. A 'work in progress amount' has the meaning given to it in subsection 25-95(3) of the ITAA 1997 (section 995-1 of the ITAA 1997). This definition provides that an amount is a 'work in progress amount' to the extent that: (a) an entity agrees to pay the amount to another entity (the recipient); and (b) the amount can be identified as being in respect of work (but not goods) that has been partially performed by the recipient for a third party but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work.

An amount received by a partner in consequence of their disposal of their interest in the work in progress of their partnership would be assessable to them. As the definition of the term 'work in progress amount' uses the words 'to the extent' it also contemplates a situation where this amount is an apportioned amount of a greater sum.

In the circumstances here no money was actually paid to the partners in respect of the transfer of their interest in the work in progress to the company. Rather they received shares in the new company. Subsection 21(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that: Where, upon any transaction, any consideration is paid or given otherwise than in cash, the money value of that consideration shall, for the purposes of this Act, be deemed to have been paid or given.

This provision applies for the purposes of both the ITAA 1936 and the ITAA 1997 (see definition of 'this Act' in section 995-1 of the ITAA 1997).

As a result of the application of subsection 21(1) of the ITAA 1936 the provision of non-cash consideration can constitute the payment of an amount for the purposes of subsection 25-95(3) of the ITAA 1997.

Accordingly, the taxpayer is deemed to have received consideration equal to the market value of their interest in the partnership's work in progress as at the date of transfer. This amount constitutes a 'work in progress amount' for the purposes of subsection 25-95(3) of the ITAA 1997 and forms part of the taxpayer's assessable income under section 15-50 of the ITAA 1997. (Note: Section 15-50 of the ITAA 1997 applies to amounts paid on or after 23 September 1998.)