Deferring Assessable Income

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  • Income received in advance of services being provided is, generally, not assessable until the services are provided.
  • Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June in order to defer the income.
  • A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. If the disposal of an asset will result in assessable income, a taxpayer may want to consider postponing the disposal to the following income year.
  • Roll-over relief may be available for balancing adjustments arising from an involuntary disposal of assets where replacement assets are acquired.

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TECHNICAL SUMMARY

The timing of when income is included in the assessable income of a taxpayer will depend on whether it is statutory income or ordinary income. Statutory income is included in assessable income at the time specified in the relevant provisions dealing with that income. Ordinary income is included in assessable income when it is derived, unless a specific provision includes the amount in assessable income at some other time.

Consideration must be given to the nature of any particular income – is it revenue or capital? – because the difference in tax treatment will ultimately have an impact on the taxpayer’s tax position.

Business income

The question of when ordinary income of a business is derived and to be included in assessable income will depend on whether the business returns income on a cash basis or on an accruals basis.

If a business uses the cash basis, ordinary income is, generally, derived in the year in which the business receives the income. Conversely, if the business reports income on an accruals basis, ordinary income is derived when a recoverable debt is created such that the taxpayer is not obliged to take any further steps before becoming entitled to payment.

Payment received in advance

Income received in advance of services being provided is, generally, not assessable until the services are provided (the Arthur Murray principle). This principle applies regardless of whether a taxpayer reports its income on an accruals basis or on a cash basis.

Work in progress

In relation to manufacturers, partly manufactured goods that are not “finished” goods are treated as trading stock and it is necessary to determine the difference between the opening and closing value of the trading stock for the income year. (See Trading stock on page 9.)

TIP: Taxpayers who provide professional services may consider, in consultation with their clients, rendering accounts after 30 June in order to defer the income.

Income from property

Income from property is essentially all income that is not personal exertion income. It includes interest, rent, dividends, royalties and trust distributions. The timing of when such income is derived for non-business taxpayers is as follows:

Category When income is derived
Interest In the year of receipt
Rental income In the year of receipt
Dividends In the year of receipt
Royalties In the year of receipt
Trust distributions In the year in which the income is derived by the trust
  • STOP: If the income has been applied or dealt with on behalf of a taxpayer, the taxpayer is taken to have received the income as soon as it is so applied or dealt with, even though the taxpayer has not physically received the income (the principle of constructive receipt): see s 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997).

Sale of depreciating assets

A taxpayer is required to calculate the balancing adjustment amount resulting from the disposal of a depreciating asset. The balancing adjustment amount is calculated by comparing the termination value against the adjustable value. If the termination value is greater than the adjustable value, the difference is included as assessable income of the taxpayer. If the termination value is less than the adjustable value, the difference is a deduction available to the taxpayer.

TIP: If the disposal of an asset will result in assessable income, a taxpayer may want to consider postponing the disposal to the following income year. However, if it is not possible to delay the disposal, consideration may be given to whether a balancing adjustment roll-over relief is available. If the disposal of an asset will result in a deduction, it may be beneficial to bring the disposal forward to the current year.

Balancing adjustment roll-over relief

Balancing adjustment roll-over relief effectively defers a balancing adjustment until the next balancing adjustment event occurs. Broadly, the roll-over relief will apply automatically if the conditions listed in s 40-340(1) of ITAA 1997 are satisfied. If the automatic roll-over relief applies, the transferor must give a notice containing sufficient information about the transferor’s holding of the asset for the transferee to work out how Div 40 applies to the transferee’s holding of the depreciating asset.

TIP: Roll-over relief may be available for balancing adjustments arising from an involuntary disposal of assets where replacement assets are acquired.

An optional roll-over relief is available in a partnership scenario if the composition of the partnership changes or when assets are brought into or taken out of the partnership. To defer any balancing adjustments, the existing partners and the new partner can jointly elect for the roll-over relief to apply.

TIP: A small business entity can access the optional roll-over relief.

  • STOP: The optional roll-over relief is not available unless the original holder retains an interest in the asset after the change.