The Commissioner issued draft Ruling TR 2017/D8 on Wed 18.10.2017. It explains the methods taxpayers can use to return income derived, and recognise expenses incurred, in long-term construction projects (ie those straddling 2 or more income years). The ATO describes TR 2017/D8 as a “refresh” of the former ruling on this matter, IT 2450. The Draft also incorporates the views expressed in various determinations, all of which were withdrawn on the same day (see below). There are no changes to the Commissioner’s views.
The Commissioner’s preliminary view is that one of 2 methods of accounting may be adopted.
- The first method is the basic approach, which is essentially the accruals method. Under this method, assessable income for an income year includes all progress and final payments received in the year, plus any amounts billed or billable to customers in the year for work carried out and certified as acceptable for payment. Amounts retained under a retention clause should not be included in assessable income until the taxpayer either receives them or is entitled to receive them from the customer, the ATO says. Losses or outgoings incurred during the income year are deductible to the extent permitted by law.
- The second method is the estimated profits basis. This method is similar to AASB 15 (Revenue from contracts with customers), which will be compulsory from 1 January 2018. Under the estimated profits basis, the ultimate profit or loss on a project can be spread over the years required to complete the contract. However, the ATO requires the basis of spreading to be fair and reasonable and in accordance with accepted accountancy practices. The “ultimate profit or loss” is in effect the notional taxable income expected to arise under the contract, which can be adjusted from year to year according to expectations existing at the close of each income year. Only those costs that are identified as likely to be incurred over the period of the contract and which are properly deductible may be taken into account in calculating notional taxable income, the ATO says.
Once a particular method is chosen, the ATO expects the taxpayer to apply it consistently for the duration of the contract. The same method should also be applied to all similar contracts entered into by the taxpayer.
Methods that are not acceptable to the Commissioner are the “completed contracts” basis (which brings profits and losses to account on completion of a contract), the “emerging profits” basis, plus any variation of these methods.
DATE OF EFFECT: When the final Ruling is issued, it is proposed to apply from 1 January 2018.
COMMENTS are due by 1 December 2017.
[ATO website: TR 2017/D8; LTN 199, 18/10/17; TM Oct 2017]
Replaced Rulings and Determinations withdrawn
- Ruling IT 2450 – recognition of income from long term construction contracts;
- Determination TD 92/131 – property development: are tender costs to be included in the ‘estimated profits basis’ calculation under Taxation Ruling IT 2450 and spread over the life of a long-term construction contract, or are they deductible under s 51(1) of the ITAA 1936 in the year in which they are incurred?
- Determination TD 92/186 – property development: can a construction contract which runs for less than twelve months be regarded as a long-term construction contract for the purposes of Taxation Ruling IT 2450?
- Determination TD 94/39 – property development: can costs incurred and income derived under the terms of a long-term construction contract be returned on a completed contract basis?
- Determination TD 94/65 – property development: is a ‘management reserve’ taken into account in calculating notional taxable income under the estimated profits basis of returning income from a long term construction contract?
- Determination TD 94/87 – property development: where the estimated profits method of recognising income from long-term construction contracts (Taxation Ruling IT 2450) is adopted, how is an estimated ‘ultimate loss’ arising under a contract to be recognised?