ATO Issues Draft Taxation Ruling 2017/D8

TR 2017/D8 provides acceptable methods for returning income and recognising expenses under construction contracts where construction starts and ends in different income tax years.


On 18 October 2017, the Australian Taxation Office (ATO) issued Draft Taxation Ruling TR 2017/D8. 

TR 2017/D8 provides acceptable methods for returning income and recognising expenses under construction contracts where construction starts and ends in different income tax years. 

The Draft Ruling replaces IT 2450 and various determinations, which were withdrawn on 18 October.  However, this does not reflect a change in the ATO’s views on the topic and in fact much of the phrasing in the Draft Ruling has been taken directly from the withdrawn IT 2450. 

Acceptable Methods

The two acceptable methods are:

1. The Basic Approach includes amounts as assessable income:
      a. that were received in the income tax year; and/or
      b. that were billed in the income tax year; and/or
      c. that the contractor was entitled bill at the end of the income tax year.

Upfront and advance progress payments are generally assessable income from the time of receipt until the time that the next progress payment is due. Accordingly these amounts may be proportionately assessed in more than one year.

Retentions and bank guarantees are generally not assessable income until the contractor is entitled to access the money.

The contractor cannot claim a deduction for “expected costs” under the Basic Approach. 

2. The Estimated Profits Basis requires the calculation of a notional taxable income or loss for ongoing contracts.

The notional taxable income or loss that is to be recognised in an income tax year for a contract would be calculated as:

      a. the overall expected taxable income or loss, calculated at the end of the income tax year
      b. multiplied by the percentage of construction completed to the end of the income tax year
      c. minus amounts included as notional taxable income in prior income tax years.

The annual calculation allows for year to year changes in the overall expected taxable income.  

There are circumstances where amending prior year returns may be appropriate.  The Draft Ruling gives the following examples:

  1. Incorrect yearly allocation of notional taxable income and where the rate of tax changed during the contract; or

  2. Where the sum of notional taxable income differs from the ultimate total taxable income from the contract.  

Take the example of a contract that starts on 1 July 2018 and ends on 30 June 2020 (2 year contract), and: 

  • At 30 June 2019 the overall expected taxable income from the contract was $1m and 30% of construction had been done.  Accordingly a notional taxable income of $300k was included in the 2019 tax return

  • At 30 June 2020 the contract has ultimately resulted in an overall tax loss of ($100k). 

  • The 2019 tax return may be amended to reduce the notional taxable income from $300k to a loss of ($30k).

The ultimate taxable income or loss realised from the contract needs to equal the sum of all notional amounts included in the tax returns of the contractor over the life of the contract.

The Estimated Profits Basis is similar to AASB 15, however “the introduction of AASB 15 does not necessarily bring into line the accounting recognition of revenue with the tax law” as noted in the Draft Ruling.  Accordingly the accounting and tax treatment may be different. 

Once a method has been chosen by an entity for one contract, an entity should apply the same method to all similar contracts.

The Draft Ruling also reiterates the ATO’s position that the Completed Contracts Basis and the Emerging Profits Basis are unacceptable methods of determining the income tax treatment for long term construction contracts.

A key difference between the two acceptable methods is the inclusion of estimated costs under the Estimated Profits Basis.  Cost estimates to be used in notional taxable income calculations under the Estimated Profits Basis require robust calculations with “sufficiently informative” supporting documentation. 

What's new in TR 2017/D8?

In short, very little.

The ATO provides some examples of methods for determining the overall expected taxable income including:

  1. Determining expected overall accounting profit and then applying tax adjustments; or

  2. Using total expected receipts as assessable income minus total expected deductions, assuming all would occur in the life of the contract.


  • References to AASB15 are brief. Ultimately the accounting and tax concepts may be similar but not the same.

  • The Draft Ruling does not mention the requirement for companies in the “one group” to use the same method, which was in IT 2450.


What next

The Commissioner is seeking comments on TR 2017/D8 by 1 December. This is an opportunity to seek clarity on issues with interpretation and application of the Ruling.

If you would like to discuss the Draft Ruling or would like more information, please contact:

Stephen O'Flynn
Partner, Tax
ShineWing Australia
T +61 3 8635 1986