8 March 2001

Work in Progress: Amounts not to be Taxed Twice

The Assistant Treasurer, Senator Rod Kemp, today announced that the Government will be introducing amendments to prevent the potential for double taxation of professional work in progress. The amendments will allow a deduction for payments on a transfer of work in progress.

Under the existing law when a partner leaves a partnership, such as through retirement or death, and an amount is paid in respect of work in progress, this amount is assessable as ordinary income to the exiting partner or their estate, but is not deductible to the new partnership.

Similarly, under the existing law, on the admission of a new partner, a payment by the new partner to the existing partners in respect of work in progress is assessable to the existing partners, but is not deductible to the new partner.

However, in each of these circumstances, the amounts subsequently received from clients by the reconstituted partnership when the work in progress is completed and billed are fully assessable in the hands of the reconstituted partnership, effectively taxing the same amount twice.

These issues can arise in the context of any transfer of an amount for work in progress, not only in the context of partnerships.

The amendments will give certainty to taxpayers and will remove the potential for double taxation. The Australian Taxation Office will consult with professional bodies and relevant interested groups in developing the necessary legislation.

Previously the Australian Taxation Office dealt with the situation of a partner retiring in Income Tax Ruling IT 2551, however this administrative approach proved no longer tenable following the court decisions in the Stapleton, Grant, Coughlan and Crommelin cases. To provide taxpayers with certainty the amendments will apply from 23 September 1998, the date of withdrawal of IT 2551.

CANBERRA
8 March 2001

Media contacts: Richard Allsop Assistant Treasurer’s Office (02) 6277 7360

David Hinds Australian Taxation Office (02) 6216 1901