Property Builder income recognition

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For long term construction contracts (contracts that are for more than 12 months), there is a specific Income Tax Ruling that deals with this, the ruling is IT2450. Essentially there are two approaches (1) Basic Method and (2) Profit Estimating.

In brief, the Basic Method allows builders to recognise income when it is received/invoiced.

The Estimated Profits Basis Method allows the Builder to estimate the profit over the period of the contract on a reasonable basis.

There is another method in the industry that has been disallowed by the ATO, where builders attempt to defer income to the end of a contract called the “Completed Contract basis”.

For further information consult the IT2450 Ruling and any subsequent tax reports on the matter at the ATO website.