Assessable income: derivation of membership fees for website access

Is the full amount of membership fees paid to the taxpayer, for unlimited access to its website for as long as the website is in operation, included in the taxpayer's assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year in which the fees are received?

Yes. The full amount of membership fees paid to the taxpayer, for unlimited access to its website for as long as the website is in operation, is included in the taxpayer's assessable income under section 6-5 of the ITAA 1997 in the income year in which the fees are received.

The taxpayer company offers members unlimited access to its website for as long as the website is in operation.

The taxpayer is not under any contractual obligation to operate the website for a specified period.

The taxpayer receives the one off membership fees from the members when the member lodges their application for unlimited access to the taxpayer's website for the lifetime of the website.

The members are entitled to cancel their membership at any time and receive a refund from the taxpayer.

Section 6-5 of the ITAA 1997 requires an amount of ordinary income to be brought to account as assessable income when it has been derived.

As general rule, it is accepted that the question of when income is derived by a taxpayer, as noted by Gibb J in Brent v. FC of T (1971) 125 CLR 418; 2 ATR 563; 71 ATC 4195: ... is to be determined by the application of ordinary business and commercial principles and that the method of accounting to be adopted is that which 'is calculated to give a substantially correct reflex of the taxpayer's true income'.

This rule has emerged from Dixon J's observation, in Commissioner of Taxation (South Australia) v. Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108; (1938) 5 ATD 98 that: ...the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income. Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realised or immediately realisable form.

This principle was endorsed in, amongst other cases, Arthur Murray (NSW) Pty Ltd v. Federal Commissioner of Taxation (1965) 114 CLR 314; 14 ATD 98; (1965) 9 AITR 673 ( Arthur Murray ) and Country Magazine Pty Ltd v. Federal Commissioner of Taxation (1968) 117 CLR 162; 15 ATD 86; (1968) 10 AITR 573 ( Country Magazine ).

Arthur Murray involved a taxpayer who carried on a business of giving dancing tuitions. The taxpayer often received payments for tuition courses in advance. Whilst students did not have a contractual right to refunds, the taxpayer occasionally made refunds. The taxpayer lodged their income tax returns on the basis that payments received in advance of lessons taught did not form part of its assessable income immediately upon receipt. The payments were only assessable once earned by the giving of the lessons.

In deciding in Arthur Murray that amounts received in advance for dancing lessons were not derived until the lessons were actually given, the Court found that the circumstances of the receipt made it 'necessary as a matter of good business sense' that the taxpayer should treat fees received but not yet earned 'as subject to the contingency that the whole or some part of it may have to be paid back, even if only as damages, if the taxpayer failed to render agreed services'.

In Country Magazine , the Court adopted a similar approach in relation to subscriptions received by a publisher for magazines to be published in future years. The Court accepted that subscriptions received for magazines to be published in a future year were derived only when the magazines had been sent to subscribers or the moneys had been used to make refunds or meet claims in respect of magazines that had not been supplied.

In this case, the taxpayer charges a one off membership fee which provides customers unlimited access to its website for as long as the website is operational. However, unlike Arthur Murray and Country Magazine , the membership fees 'come home' to the taxpayer immediately upon receiving the payments in that there is nothing more for the taxpayer to do to earn the payments. All that the taxpayer is required to do to earn the payments, at the time of receiving the membership fees, is to have an operational website to which members then have unlimited access so long as that website continues to operate.

As such, the payments are not made to the taxpayer in advance of the supply of services. The taxpayer is not under a contractual requirement to operate the website for a specified period of time. This stands in contrast to Arthur Murray , where the taxpayer there was required to render services based on the hours they were contracted to provide dance lessons, and Country Magazine where that taxpayer was required to supply to subscribers magazines issued over the contracted period.

The risk of having to make refunds is not determinative in this case. The contingency that some part or all of membership fees may have to be paid back only exists because members have a right to cancel their membership at any time. Unlike Arthur Murray and Country Magazine , the contingency is not linked to the failure to provide contracted services or goods.

Accordingly, under section 6-5 of the ITAA 1997, the taxpayer is required to include in its assessable income the full amount of membership fees in the income years it receives those fees.