When does derivation occur in relation to land sales with a deferred settlement, by business taxpayers who provide vendor finance?

Section CD 1, Income Tax Act 1994 - Land transactions

A taxpayer has asked when does derivation occur in relation to land sales with a deferred settlement by business taxpayers who provide vendor finance?

In the course of considering this question the item in PIB No. 106 - July 1980 - Sale of Land on Extended Terms was reviewed. The Commissioner no longer considers the statements in that item to be correct and it is formally withdrawn.

In relation to a sale of land, derivation generally occurs when a debt can be sued upon, which is usually also the time when the vendor loses their dispositive power. While this may be the same time as when the unconditional contract is signed, this will not always be the case. In considering the timing of derivation it is important to consider what gives the correct reflex of the taxpayer's income. For the majority of business taxpayers the accruals method of accounting, rather than the cash-receipts method, will be the most appropriate method to use, however there will be exceptions to this and the most important consideration is that the method of accounting used gives the correct reflex of the taxpayer's income.

Taxpayers should also consider whether the accrual rules apply when considering such sales where payment is deferred.

When are proceeds of land sales income?

Section CD 1 treats amounts as gross income where they are derived from the sale or other disposition of land:

(1)     Any amount derived from the sale or other disposition of land, being an amount to which this section applies, is gross income.

As section CD 1(1) sets out that income is derived when a sale of land takes place, it is necessary to establish what derivation is and when it occurs.

Generally what is derivation?

The generally accepted meaning of "derived" is as being something that is "obtained" or "got" or "acquired" as was discussed in C of IR v Farmers Trading Co Ltd (1982) 5 NZTC 61, 200, and FC of T v Clarke (1927) 40 CLR 246, 261.

Derivation occurs when income "comes home" to the taxpayer. Generally the cash or receipts method (where income is returned in the income year in which it is actually or constructively received) is used by private individuals who are salary and wage earners and some professionals. The accruals or earnings method (where income is returned in the income year in which all events which determine the right to receive income have occurred) is usually used by most business taxpayers.

Commissioner of Taxes (SA) v Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108 ("Carden's case") is an important case on derivation and is frequently referred to in subsequent decisions. The case set out general principles of derivation which allow issues surrounding derivation in particular circumstances to be considered:

Income, profits and gains are conceptions of the world of affairs and particularly of business. They are conceptions which cover an almost infinite variety of activities. It may be said that every recurrent accrual of advantages capable of expression in terms of money is susceptible of inclusion under these conceptions. No single formula could be devised which would effectually reduce to the just expression of a net money sum the annual result of every kind of pursuit or activity by which the members of a community seek livelihood or wealth. But in nearly every department of enterprise and employment the course of affairs and the practice of business have developed methods of estimating or computing in terms of money the result over an interval of time produced by the operations of business, by the work of the individual, or by the use of capital. The practice of these methods of computation and the general recognition of the principles upon which they proceed are responsible in a great measure for the conceptions of income, profit and gain, and therefore, may be said to enter into the determination of definition of the subject which the legislature has undertaken to tax. The courts have always regarded the ascertainment of income as governed by the principles recognised or followed in business or commerce, unless the legislature has itself made some specific provision affecting a particular matter or question. (p 152)

Dixon J did not consider it possible to state which method of accounting will be appropriate in each and every set of circumstances, and the following passage from his judgment provides a principle which has been referred to in numerous cases to establish which is the correct method of accounting to use in a particular circumstance:

In the present case we are concerned with rival methods of accounting directed to the same purpose, namely, the purpose of ascertaining the true income. Unless in the statute itself some definite direction is discoverable, I think that the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness. In other words, the inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income. [emphasis added] (p 154)

FC of T v Dunn 89 ATC 4141 and FC of T v Firstenberg 76 ATC 4141 also applied the principles espoused in Carden's case.

The cash or receipts method requires that income be returned for the income year in which it is actually received.  In CIR v The National Bank of New Zealand (1976) 2 NZTC 61, 150 Cooke J (as he then was) observed that the cash method generally applies to most salary and wage earners, to private individuals who do not pursue a profession or business occupation, and to some professionals.

Generally, for business taxpayers, such as developers or real estate agents who provide finance for deferred property settlements, the method of accounting to be used is the accruals method. In Carden's case Dixon J commented about the accruals method:

The foundation of the accruals system is the view that the accounts should show at once the liabilities incurred and the revenue earned, independently of the date when payment is made or becomes due. It is plainly not applicable to every pursuit by which income is earned. (p 157)

In C of IR v Farmers Trading Co Ltd (1982) 5 NZTC 61, 200 ("Farmers") Pritchard J also commented on the accruals method of accounting:

The essence of the accruals concept in this respect is that both revenue and costs are accrued (that is, recognised as they are earned or incurred not as money is received or paid), matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the profit and loss account of the period to which they relate; provided that where the accruals concept is inconsistent with the 'prudence' concept the latter prevails. (p 61, 210)

The Court of Appeal decisions of CIR v The National Bank of New Zealand (1976) 2 NZTC 61, 150 and Fincon (Construction) Ltd v C of IR [1970] NZLR 462 also considered that the accruals method is generally the most appropriate for business taxpayers.

While the above cases set out the general principles of when the accruals method of accounting should be used, there are exceptions to the general rule that business taxpayers should use the accruals method of accounting.

FC of T v Dunn 89 ATC 4141 considered D & GR Rankine v Commrs of IR (1952) 32 T.C. 520 where it was concluded that the general rule was that the accruals method of accounting was the most appropriate for business taxpayers, however, it was also acknowledged that:

There will sometimes be great practical difficulty in putting a value upon credit items at a time when they are only future or contingent or perhaps conjectural, and a like difficulty may even arise in connexion with bad or doubtful debts - all of which necessitate suspense accounts and troublesome readjustments and reopening of accounts when credits or debits mature or become ascertainable in amount ... In all such cases no objection has been taken or could be taken to the common sense practical expedient of discarding the earnings basis in favour of the cash basis as the method of computation affording in the circumstances the best practicable approximation to the desired result.  (p 4149)

In J Rowe & Son Pty Ltd v FC of T 124 CLR 421it was also acknowledged that the accruals method will not be the most appropriate method for all business taxpayers:

I do not doubt that in some cases money payable at a future date ought to be left out of account until it is received or perhaps until it falls due.  (p 438)

In each case the important question to ask, as propounded in Carden's case and others, is which method will give the most true and accurate reflex of the taxpayers income?

In relation to land sales by business taxpayers who provide vendor finance, where payment is deferred, when does derivation occur?

Derivation generally occurs when there is a right to sue upon a debt. This will commonly, but not always, be when the vendor loses their dispositive power over the land. In relation to the timing of derivation it is important to consider what will give the correct reflex of the taxpayer's income. For some sales of land the timing of derivation and settlement will be the same, but for others settlement and derivation may occur at different times. While this item is concerned with the sale of land it should be noted that the general principles of derivation are the same for land, goods and services. Just as there may be exceptions to the general rule that business taxpayers should use the accrual method of accounting, if it does not give the correct reflex of the taxpayer's income, there can also be exceptions to the general rule that derivation occurs when there is a right to sue upon a debt if this does not give the correct reflex of the taxpayer's income.

The right to receive income

The need for there to be a right to receive income in order for the income to be "derived" was referred to by Barwick CJ in Henderson v FCT 70 ATC 4016 ("Henderson"):

When the service is so far performed that according to the agreement of the parties or in default thereof, according to the general law, a fee or fees have been earned and it or they will become income derived in the period of time in which it or they have become recoverable. But until that time has arrived, there is, in my opinion, no basis when determining the income derived in a period for estimating the value of the services so far performed but for which payment cannot be properly demanded and treating that value as part of the earnings of the professional practice up to that time and as part of the income derived in that period.  (p 4020)

His Honour emphasised the point that until there is a right to receive income, derivation cannot be said to have occurred. For most business taxpayers, once everything has been done that is required for there to be a right to receive income or recover a debt, income will be "derived". This is the essence of the accruals method of accounting.

Henderson has been discussed in the Full Federal Court decision of Dormer v FC of T (2002) ATC 5078. Henderson was distinguished on the basis that the accounting practice in Henderson did not involve a change of business, unlike the facts in Dormer, and therefore the general principles from Henderson are still considered to be good law.

General cases concerning derivation

FC of T v Australian Gas Light Co 83 ATC 4800 ("Australian Gas Light") discusses several tests which have been put forward by the courts to state when income is derived, but the court concluded:

Helpful as these tests may be as signposts, each of them has been conceived in and applied to varied and contrasting circumstances. As signposts they indicate that invariably something more than provision of goods or services by the taxpayer is required. It is necessary to determine whether the consequence is that a debt has been created or whether the taxpayer is obliged to take further steps before becoming entitled to payment. (4,805)

The judgment in Australian Gas Light highlights the fact that there are no firm rules which can determine the time at which derivation will occur in any given transaction. Instead it acknowledges that when derivation occurs is generally determined by the time when a debt can be sued upon, which will be affected by the particular facts of the case. The case is significant as it acknowledges that if further steps are required before the taxpayer is entitled to sue for a debt after a "sale" has taken place, then derivation will only occur once those steps have been taken and the taxpayer is able to sue for the debt.

The frequently cited case of Arthur Murray (NSW) Pty Ltd v C of T 114 CLR 314 ("Arthur Murray"), which relates to the derivation of income from services is an example of an exception to the general rule that derivation occurs when there is a right to sue upon a debt. That case involved payment of tuition fees for dance lessons. Students paid in advance for a set number of lessons or a lifetime of lessons to be taken in a certain period. The taxpayer put these advanced fees into a separate account and only transferred the money for each lesson, once that lesson had been received. This was in the event that the tuition fees may need to be refunded if the lessons were not taken (even though there was no contractual obligation for the taxpayer to refund money, they had a practice of doing so). The court held that the fees were derived only when the money was transferred from the separate account to the taxpayer's general account.

Therefore in Arthur Murray derivation was held to take place not when a debt was due, but when the necessary steps had been completed for the taxpayer to have a right to receive payment, even though the taxpayer had already received the money. This gave a more correct reflex of the taxpayer's income as the taxpayer did not have the right to use the money until it had fulfilled its side of the agreement and provided the dance lessons.

A case to note which qualifies the general rules on the timing of derivation of income is BHP Billiton Petroleum (Bass Strait) Pty Ltd & Anor v FC of T (2002) ATC 5169. This case dealt with the situation when there is a bona fide dispute between the parties to a contract as to an amount owed.

Land sale cases concerning derivation

Cases that have specifically dealt with land sales adopt the same approach as the one taken in general cases concerning derivation. The Commissioner considers that the judgments in both Gasparin v FCT (1994) 94 ATC 4, 280 ("Gasparin")and Ruddenklau v Charlesworth [1925] NZLR 161support the concept of derivation generally occurring when there is an enforceable debt (which is different from there being an ability to sue for specific performance) and that this is generally the same time as the vendor loses their dispositive power over the property.

Gasparin involved a taxpayer who was a builder and land developer involved in the subdivision of a piece of land into allotments. Settlement of the sales was subject to the "acceptance, deposit and registration of the plan of subdivision in the Land Titles Office on or before 30 July 1985". On or before 30 June contracts relating to nine of the allotments had been settled. The contracts relating to the remaining 64 allotments were settled in the following financial year. The taxpayer treated these 64 allotments as "closing stock on hand" for accounting and taxation purposes. The Commissioner disagreed and considered that because the sales had become unconditional on or before 30 July 1985, that the allotments had ceased to be trading stock and were actually "sales".

In Gasparin, von Doussa J held that income was derived from the sale of the allotments which comprised their trading stock at the time of settlement (not when the contract became unconditional), when a debt accrued due from the purchaser to the taxpayer. It was held that the time when the debt arose was the critical consideration.

It was also held that each allotment remained trading stock on hand until settlement - as that was the time under the contract when the vendor taxpayer lost all dispositive power and the contingency that the sale would not proceed to completion had disappeared.

After considering other Australian authorities, von Doussa J concluded:

In my opinion it should be held that the joint venturers derived income from the sale of the allotments of land which comprise their trading sock not when the contracts became unconditional, but at settlement when a debt accrued due from each purchaser to the joint venturers.  The critical consideration is the time when the debt arose.  [emphasis added]  (4288)

The judgment in Gasparin referred to the New Zealand case of Ruddenklau v Charlesworth with approval. In Ruddenklau v Charlesworth, a contract for the sale and purchase of 747 acres of land had been entered into between the vendor Ruddenklau and the purchaser Charlesworth. A deposit on the purchase price of £200 was required to be paid. Possession of the land was then to be taken by Charlesworth on 7 January 1919 when a further £200 was payable. There were then specific dates set out for specific amounts to complete the purchase price to be paid. The purchaser paid the initial £200, but did not make any further payments, but remained in possession until October 1923 when he abandoned the property. Charlesworth argued that while he was liable to pay interest on the unpaid balance of the purchase-money up to 1 February 1923 (which was the date upon which the balance of the purchase price was to be paid according to the contract), he was not liable for any interest after that. Ruddenklau contended that until the contract was rescinded or completed the purchaser was liable to pay interest on the balance of the purchase price, so long as it remained unpaid.

In Ruddenklau v Charlesworth it was stated:

As a general rule, on the failure or refusal of a purchaser to complete an executory contract for the purchase of land the vendor is not entitled to sue for the purchase money as a debt. He is entitled merely to sue for specific performance or for damages for the loss of his bargain. It is only when the contract has been completed by the execution and acceptance of a conveyance that unpaid purchase money may become a debt and can be recovered accordingly.  (p 164)

The judgment also discussed situations where a debt may arise earlier than the time of settlement and conveyance:

... a contrary intention is sufficiently shown in all cases in which by the express terms of the contract the purchase-money or any part thereof is made payable on a fixed day, not being the agreed day for the completion of the contract by conveyance. In all such cases the purchase-money or such part thereof becomes on the day so fixed for its payment, a debt immediately recoverable by the vendor irrespective of the question whether a conveyance has been executed and notwithstanding the fact that the purchaser may have repudiated his contract.  (p164)

This suggests that in relation to the sale and purchase of land, derivation can occur at a time earlier than settlement when a debt arises before that point. This conclusion is reached on the specific facts of the case which provided for set amounts to be paid on particular days with settlement occurring at a later stage. The Commissioner does not consider that this decision means that derivation occurs when a deposit is made on the purchase price prior to settlement, but rather it occurs when the contract provides for several payments to be made prior to settlement, and the purchaser may already have possession of the land.

The New Zealand Court of Appeal in Hawkes Bay Power Distributions Ltd v CIR (1999) 19 NZTC 15,226 appeared to agree with the Australian decisions in Australian Gas Light and Gasparin that when derivation occurs (when a debt accrued due from the purchaser and could be recovered accordingly) will depend on the particular facts and circumstances of a case as well as the provisions of any contract involved. This confirms that the reasoning in Gasparin is not confined to the Australian situation alone, but is also authoritative law, applicable in New Zealand, on the timing of derivation.

Derivation in relation to deposits

The timing of derivation in relation to deposits does not differ from the general principles relating to the timing of derivation. Generally, the existence of a deposit will not affect the timing of derivation. In line with ordinary principles, derivation still occurs when the income has "come home" to the taxpayer and there is an ability to sue upon a debt, or a right to receive the money. Only when the contract, under which the deposit was made, is settled and can be sued upon, does derivation normally occur.

If, for example there was a situation similar to that of Ruddenklau v Charlesworth (referred to above) where the deposit was the first of several part payments of stipulated amounts as provided for in the contract to be paid on set dates, then the timing of derivation will most likely be affected as there is a right to each part payment and if the money is not paid, then there is a debt which can be sued upon.

Whether the deposit is refundable or not in the event of a contract not proceeding through to settlement will affect the timing of derivation. However this does not differ from the ordinary principles of derivation discussed earlier. If the deposit is to be retained regardless of whether the transaction is completed then it is income which has been derived. This does not means that the whole of the purchase price is derived - just the amount of the deposit made at the time. If the transaction did proceed, then the balance of the purchase price is derived when the contract is settled and can be sued upon.

Are there any exceptions to the general rules about derivation?

The cases of Harrison v John Cronk & Sons [1936] 3 All ER 747 ("Cronk") and Absalom v Talbot [1944] 1 All ER 642 ("Absalom") could potentially be seen as providing an exception to the rule that the accruals method of accounting is generally the most appropriate for business taxpayers. However the Commissioner considers that Cronk and Absalom do not deviate from the general principles of derivation. The cases do not disagree that generally, business taxpayers should return income on an accruals accounting basis, and as must be done in all cases, the particular circumstances and nature of the transactions were taken into account to give the correct reflex of the taxpayer's income. Rather, when the quite unusual facts and nature of the transactions in those cases were considered, the courts concluded that to apply the general principles would be inappropriate and the cash-receipts method of accounting was more appropriate. The decisions have limited application for future decisions unless very similar fact situations present themselves.

Cronk involved a taxpayer building company which built and sold houses to purchasers of small means. A building society advanced to purchasers the whole of the purchase money to be repaid with interest in equal monthly instalments. Only part of the purchase money was paid to Cronk with the remainder retained by the building society as security in the event of default by the purchaser.

Cronk appears to have been largely decided on its particular facts and the provisions of the contract that existed between the building society and the taxpayer. Lord Thankerton's judgment appears to accept the general principle that business taxpayers should generally return income on an accruals basis, but stated that in this instance it was not appropriate as the taxpayer was not going to receive payment for many years:

I am unable to agree with the view of the Commissioners and of Findlay J. that the whole of the purchase price should be brought into the account as a trading receipt at the time of sale.  (p 193)

In Absalom the appellant taxpayer was a speculative builder who sold properties to purchasers of small means. The purchasers paid only a small deposit, with a building society advancing the greater part of the balance on first mortgage, and the taxpayer advanced the remainder of the balance on the security of a second mortgage under which the debt was repayable with interest by instalments over a long period of time.

In Absalom, Lord Atkin stated the general principle that business taxpayers use the accrual method of accounting:

No one doubts that in ordinary commercial practice where goods are sold on terms of ordinary commercial credit, three or six months or even more, traders are in the habit of treating the debt so created as part of the profits of the year in which the debt is incurred.  (p215)

However on the facts of this case and after consideration of the particular circumstances of the taxpayer's business, Lord Atkin concluded:

According to the Crown's contention it makes no difference whether the price of goods is to be paid forthwith or at the end of twenty years or by instalments over twenty years, and whether with interest or not, nor, apparently, is the possibility or probability of the debtor being unable to continue the payments over the whole period a matter to be taken into account. To my mind, to treat money to be paid in twenty years hence as producing a profit this year equal to money in fact paid this year is to produce a completely unreal conception of yearly profit, and I venture to think quite foreign to any commercial ideas on the subject.  (p215)

Lord Atkin's acknowledgement that the transaction in Absalom was an extraordinary one conforms with the leading authorities in the area of derivation, such as Carden's case, which emphasise that the nature of the business will be one factor which determines which method of accounting the taxpayer uses.

The principle taken from the majority judgments in Absalom is that concern was had over the high risk that the builder would not receive payment, due to the purchasers being of "limited means" and the long period over which payments were to be made - therefore making it unfair that they should have to return the income at one time. The case states that the accruals method is generally the most appropriate method of accounting for business taxpayers however the nature and circumstances of the case (the high risk of non-repayment and the long period of time before receiving payment), meant that the accruals method of accounting was inappropriate.

Although the judgments in both Cronk and Absalom do not discuss the general principles of derivation at any great length, it is apparent the House of Lords did in reality apply the derivation principles to reach the conclusion as to which is the most appropriate method for the builder taxpayers in these cases.

It appears that it was a regular part of the business of the taxpayers in both Cronk and Absalom to sell properties to purchasers of limited financial means. Therefore, while the cases have unusual facts which do not entirely conform to the principles espoused in other cases, they do still fit within the framework.

The cases of Farmers, National Bank, Gardner, Mountain and D'Ambrumenil Ltd v IRC [1947] 1 All ER 650, 29 TC 69 discuss the House of Lords' decisions in Cronk and Absalom. These cases distinguished Cronk and Absalom on the basis that they were decided on the special facts of the cases and were not therefore able to be applied. However they were not overruled or considered to be bad law.

Timeframes for payment do not determine when business taxpayers should use the cash-receipts method of accounting

It is inappropriate to stipulate a fixed period of time at which point it becomes suitable for business taxpayers to use a cash-receipts method rather than an accruals method of accounting. To do so would be contrary to the principles espoused in cases such as Carden's case, Fincon, and Henderson, that the particular nature and circumstances of the transaction involved will determine the correct method of accounting.

While the length of time before repayment of a debt in a transaction would be one factor to consider in reaching a conclusion on the most appropriate method of accounting, other factors such as the likelihood of repayment, the creditworthiness of the debtor and the ability to value the debt are also relevant in reaching a conclusion. The Commissioner therefore considers that an exception to the general rule which only takes one factor into consideration is inappropriate.

It appears from the background to the item in PIB No. 106 that the two exceptions as to when derivation occurs for business taxpayers contained in the item (1. The agreement provides for a small deposit with the balance payable by instalments over a period greater than ten years; or 2. The vendor at the time of sale secures the unpaid consideration by a second mortgage which has a term greater than 10 years) were based on the cases of Cronk and Absalom. The 10 year period appears to have been developed from the periods of time contained in those two cases, and the fact that the court in Fincon had considered that payment being deferred for 6 years was not long enough to require the taxpayer to return their income on a cash basis rather than an accruals basis.

The Commissioner now considers that the adoption of an estimated time frame of 10 years, taken from the cases of Cronk and Absalom does not reflect the fact that those cases were very fact specific and it is unlikely that the House of Lords intended the time-frames thrown up by the facts of those cases to go on to form a general rule. Taxpayers should take care to note that if a section within the Income Tax Act 1994 stipulates the timing of derivation for that particular section, this will override the general principles of derivation taken from case law.

The impact of the accrual rules

The Commissioner considers that it is also likely that the accrual rules have an impact on business taxpayers who provide vendor finance to purchasers on deferred property settlements. These rules were enacted subsequent to the publication of the item in PIB No. 106.

The sale and purchase of property (including land), where receipt of consideration is deferred comes within the section EH 22(1)(b) definition of "financial arrangement" which is the first requirement in deciding whether a transaction is subject to the accrual rules. 

In addition, deferred sales by the taxpayers specified would not generally come within the definition of "excepted financial arrangement" in section EH 24(1), unless payment of the purchase price was deferred for a period of less than 93 days, as contained in the definition of "short term agreement for the sale and purchase of property".

As it appears such a sale of land is a "financial arrangement" it will be necessary for taxpayers involved in these financial arrangements to use a spreading method  over the period of the arrangement and calculate the base price adjustment when the financial arrangement comes to an end.  A spreading method must generally be used (except where a party to the financial arrangement is a cash basis person) to spread the return on the financial arrangement (the difference between income and expenditure which is deemed interest) over the term of the financial arrangement.

The base price adjustment is a kind of "wash-up" calculation to catch any amounts which have not been accounted for during the financial arrangement. In brief terms, the BPA formula in section EH 47 (consideration - income expenditure amount) requires the amount which is the lowest price the parties would have agreed on had the transaction not involved a deferred payment to be taken into account. Section EH 48 defines "consideration" and section EH 48(3) requires the "lowest price ... the parties would have agreed on ... if payment would have been required in full at the time the first right in the contracted property was transferred or the services provided for", to be taken into account under "consideration". Determination G17B provides the means to calculate the value that can be inserted into the BPA formula in these circumstances. Determination G17B has not been updated since the Division Two Accrual Rules were introduced, however section 90AA of the Tax Administration Act 1994 states that such determinations apply "in principle" until a new and relevant Determination is made by the Commissioner under section 90AC of the Tax Administration Act 1994.

Section EH 26(1) gives the accrual rules priority unless another section of the Income Tax Act 1994 expressly states otherwise. Section EH 26(3) means that the accruals impact needs to be taken into account where the consideration paid for any property is relevant under any non-accrual section of the Income Tax Act 1994, and the value of any property transferred will need to be determined in accordance with section EH 48(3) of the Act.

As noted earlier, the item in PIB No. 106 was published prior to the enactment of the accrual rules, and so they were not taken into account when considering the appropriate approach in the area of sales were payment was deferred.

The reasons for withdrawing the item in PIB No. 106

The item in PIB No. 106 provides that a sale of land takes place (and therefore derivation occurs) when there is an enforceable contract and gives the example of an unconditional agreement for sale and purchase, stating that there is an enforceable contract at the time the agreement is signed by both parties.

The item also provides the two exceptions which are discussed above.

The Commissioner considers that the item in PIB No. 106 is inaccurate for the reasons elaborated on above and is therefore withdrawn.

Conclusion

The Commissioner considers that derivation occurs when a sale takes place and a debt arises which can be sued upon, and generally this will be the same time as the vendor loses their dispositive power. While a debt may arise at the time an unconditional contract is signed; this will not always be the case. When considering when derivation occurs it is important to consider what will give the correct reflex of the taxpayer's income.

The accruals method of accounting will generally be the most appropriate method for business taxpayers to use, and the cash-receipts method will generally be the method for private individuals who are salary and wage earners and some professionals. While these methods of accounting are generally appropriate for these two groups of taxpayers it is always important to consider and apply the method that gives the most true and accurate reflex of the taxpayer's income.

The accrual rules will generally need to be taken into account when considering sales where payment is deferred.

As a result of considering the question asked, the item in PIB No. 106 was reviewed, and the Commissioner no longer considers the statement in that item to be correct and it is hereby formally withdrawn.