Earlier this month IRD released the draft interpretation statement “Income Tax – Timing – When is income from professional services derived?” which replaces three older statements.

The Draft Interpretation Statement steps through the key principals of income derivation covering both legislation and case law, and provides guidance as to when the cash basis method vs accrual basis method should be used.

When determining which method should be used by a particular business or profession the Statement provides that cash basis is appropriate for very small scale professions and the Statement steps through a number of indicators which will assist in making this assessment. These include:

  • The type of activity carried on by the taxpayer that gave rise to the income;
  • The characteristics of the type of income at issue;
  • The legal and regulatory environment in which the taxpayer operates;
  • The scale of the business or income-earning activity; and
  • The level of sophistication or complexity of the business.

Those using the cash basis will derive income when it is received compared to the accrual basis deriving income when it is earned. The statement also discusses in greater detail of when income is “earned” using the accrual basis, addressing the relevance of standard accounting principles and the terms of the contract.

The Statement provides that while the older PIB’s suggested that professionals other than medical practitioners and barristers must account for income on an accrual basis, there is no general rule of law to suggest any particular profession should account for one method over the other, and it is a question of fact using the indicators above, having regard to the nature of the business or income earning activity of any professional.

The deadline for comment on PUB00231 is 22 September 2016.