Commissioner refreshes long term construction contract ruling

The Commissioner has released Taxation Ruling TR 2017/D8 which deals with the income tax treatment of construction contracts that extend beyond one income year. TR 2017/D8 is essentially a re-write of Taxation Ruling IT 2450 which has been in effect since 1 October 1987. The release of TR 2017/D8 is part of Project Refresh, an ATO initiative to modernise public rulings that have not been updated for an extended period of time.

TR 2017/D8 does not include the preamble contained in IT 2450 and  the content of IT 2450 has been condensed in line with the Commissioner’s recent practice of producing more simplified, example based guidance (whether binding and non-binding). TR 2017/D8 is expected to apply from 1 January 2018.

Importantly, TR 2017/D8 does not alter the existing income tax treatment of long term construction contracts. In this regard, it remains the Commissioner’s view that:

  • the basic approach and estimated profits basis are acceptable methods for recognising the income tax consequences of long term construction contracts;
  • taxpayers must continue to choose a consistent method to recognise income and deductions under similar long term construction contracts;
  • specific features of the basic approach including recognition of progress and final payments, up-front payments, retention clauses, deductibility of work-in-progress and expected costs remain unchanged; and
  • liability to income tax has to be determined annually. As such, the completed contracts basis (also known as the emerging profits basis) remains an unacceptable method for determining taxable income from long term construction contracts.

Interestingly, TR 2017/D8 provides additional guidance on costs taken into account under the estimated profits basis and emphasises that cost estimates must be made relying on the taxpayer’s experience in the construction industry and using sound commercial or business principles. Additionally, tender costs are to be excluded from the calculation of estimated profit, as they occur before the beginning of the contract.

TR 2017/D8 also specifically addresses the impact of the new accounting standard AASB 15 Revenue from contracts with customerswhich compulsorily applies from 1 January 2018. The accounting treatment of long term construction contracts under AASB 15 is similar to the estimated profits basis but the timing of income recognition under AASB 15 may not align with the tax treatment. Therefore, taxpayers adopting AASB 15 should ensure that income and expenses are being recognised in the appropriate period for income tax purposes.

Industry has been involved in the consultation process for TR 2017/D8 and it is not expected that there will be any further substantial changes to it prior to its finalisation. 



Andrew White



Chris Colley



Chris Aboud

Senior Associate