Work in Progress is Assessable Where There Is No Entitlement to Payment

Q&ATax

Question :

Is the Work in Progress assessable where there is no entitlement to payment until after completion of
a project?

Mr C is a builder and has a value of WIP at the end of the financial year but cannot issue the invoice
until the next financial year when the project is completed.

They have incurred expenses for wages/contractors and some materials.

Please advise how the profit or loss will be spread?

 

Answer :

TR 2018/3 is the recently finalised new ruling on long term construction contracts (ie, contracts that
span more than one income year).

The timing of the income being assessed and expenses being deductible for a long-term construction
contract depends on whether the client is using the basic approach or the estimated profits basis.

The only comment in the ruling made by the ATO in relation to work in progress (WIP) is that this does
not represent trading stock (refer to paragraph 15 of TR 2018/3). From a tax perspective, it seems
unlikely that you would make any tax adjustments to income or deductions for WIP.

However, if the basic approach is used, once the work reaches the point where it is or can be billed to
the customer (we understand it will be when the project is completed in your client’s case) then the
relevant amount should be recognised as income. The expenses of the long-term construction contract
should be deductible when it is incurred for tax purposes (when the client had a presently existing
liability to pay the amount). Refer to paragraph 7 to 14 of TR 2018/3 for further guidance.

On the other hand, if the estimated profit basis is used then the ultimate profit or loss will be spread
over the income years have taken to complete the long-term construction contract (provided that the
basis is reasonable, is in accordance to accepted accounting practices and appropriate adjustments are
made for tax purposes). Refer to paragraph 17 to 20 and the worked examples in TR 2018/3 for
further guidance.

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