Taxation Determination

TD 93/18

Income tax: what factors does a taxpayer need to consider in deciding between the cash and accruals methods of accounting for income for taxation purposes?

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FOI status:

may be releasedFOI number: I 1214002

1. Total assessable income under subsection 25(1) of the Income Tax Assessment Act 1936 must be calculated using a method which brings to account and correctly reflects a taxpayer's true income (C of T (SA) v. Executor Trustee and Agency Company of South Australia Ltd (1938) 63 CLR 108; 5 ATD 98).

2. The cash method brings to account as assessable income all cash amounts received during the year of income. The accruals method brings to account as income amounts charged or chargeable, irrespective of whether these amounts have been collected in the income year. These methods refer to the calculation of assessable income. Whichever method is used, a taxpayer is only entitled to a deduction under subsection 51(1) for a loss or outgoing which has been incurred.

3. In determining which method is more appropriate the courts have considered:

(a)

the size of the business;

(b)

the type of business;

(c)

method of accounting;

(d)

current practice in the industry;

(e)

overhead costs; and

(f)

policy for recovery of outstanding debts.

Of course, any other relevant factors must also be considered.

4. The relative importance of each of these factors will depend on the particular circumstances of each case. Generally the smaller the business the more likely the cash method should be used. It is important to note that there is no threshold relating to size etc which will determine the most appropriate method.

5. In Henderson v. FC of T (1970) 119 CLR 612; 70 ATC 4016; 1 ATR 596 the court held that the accruals method was the most appropriate. Mr Henderson was an accountant who was in partnership with 18 others and the business operated on a large scale. Almost three hundred people were employed, fees earned in the relevant years exceeded $1 million and bad debts were virtually non-existent.

6. In FC of T v. Firstenberg (1976) 6 ATR 297; 76 ATC 4141 it was held that the cash method was the most appropriate. Mr Firstenberg practised as a solicitor on his own account and his only employee was his secretary-typist-telephonist.

7. The most recent case is this area is Barratt v. FC of T 23 ATR 339; 92 ATC 4275. In determining which method was more appropriate the court considered those factors listed in paragraph 3 which were relevant to the circumstances.

Commissioner of Taxation
04/02/93

Previously issued as Draft TD 92/30

References

ATO references:
NO TD/92/0003/Par

Subject References:
accounting method
accruals method
assessable income
cash method

Legislative References:
ITAA 25

Case References:
C of T(SA) v. Executor Trustee and Agency Company of South Australia Ltd
(1938) 63 CLR 108
5 ATD 98

Henderson v. FC of T
(1970)119 CLR 612
70 ATC 4016
1 ATR 596
FC of T v. Firstenberg
(1976) 6 ATR 297
76 ATC 4141
Barratt v. FC of T
23 ATR 339
92 ATC 4275