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WilliamHu(Champion)Champion
6 Sept 2022

Hi,


We are a company providing a construction service. We are accounting our revenue using "percentage of completion"(POC) method. That is to recognize accounting revenue based on actual cost/planned cost(progress of the work). For example, if we invoiced our client for $1m for the whole project but we only finish 50% of the total works based on POC, we only recognize $500k for sales and another $500k is in contract liability, which is in accordance with AASB. But we want to confirm how much is our taxable revenue. Is it $1m (invoiced amount) or $500k (the same as accounting revenue).

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2,019 views
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Most helpful reply

CaroATO(Community Support)Community Support
8 Sept 2022

Hi @WilliamHu,


There are 2 methods we accept for long term construction projects.


They are:


  1. the basic approach, and
  2. the estimated profits basis


When using option 1, all work and final payments the company receives in a year are reported as assessable income. The company can claim costs as a deduction.


If the company is using option 2, you'd be allocating on a fair and reasonable basis the profit or loss over the time it takes to finish the contract.


We don't accept the completed contracts basis or the emerging profits basis. This is because we want tax liabilities to be established annually.


Have a look at TR 2018/3. Paragraphs 6 and 7 talk about the basic approach and paragraphs 17 and 18 the estimated profits basis.

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Most helpful reply

CaroATO(Community Support)Community Support
8 Sept 2022

Hi @WilliamHu,


There are 2 methods we accept for long term construction projects.


They are:


  1. the basic approach, and
  2. the estimated profits basis


When using option 1, all work and final payments the company receives in a year are reported as assessable income. The company can claim costs as a deduction.


If the company is using option 2, you'd be allocating on a fair and reasonable basis the profit or loss over the time it takes to finish the contract.


We don't accept the completed contracts basis or the emerging profits basis. This is because we want tax liabilities to be established annually.


Have a look at TR 2018/3. Paragraphs 6 and 7 talk about the basic approach and paragraphs 17 and 18 the estimated profits basis.

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What is the Revenue Recognition for Construction Company Using POC Method? | ATO Community