Engineering and management consulting firms operate differently from retail or hospitality businesses. Revenue is earned over time, often under long-term contracts; costs are incurred in advance of billing; and professionals routinely incur disbursements on behalf of clients. Getting the bookkeeping right requires a solid understanding of AASB 15 and the specific deductibility rules that apply to professional services.
Revenue Recognition Under AASB 15
AASB 15 Revenue from Contracts with Customers applies to all engineering and consulting engagements. For long-term contracts — feasibility studies, infrastructure design projects, managed services retainers — revenue is recognised over time rather than at a point in time.
The input method is most commonly appropriate for professional services: revenue is recognised in proportion to costs incurred relative to total expected contract costs. If a $500,000 engineering contract is 40% complete by costs, $200,000 is recognised in the current period regardless of how much has been invoiced.
Journal entry at period end for a contract 40% complete:
Dr Work in Progress (Balance Sheet) $200,000
Cr Revenue — Engineering Services $200,000
Dr Accounts Receivable $150,000
Cr Contract Liability (Deferred Rev) $150,000
(if billed amount is less than revenue recognised)
When billing exceeds recognised revenue, the excess sits as a contract liability (deferred revenue), not income. When recognised revenue exceeds billing, the shortfall is recorded as a contract asset (WIP receivable).
Work in Progress (WIP) Valuation
WIP is the balance sheet representation of unbilled but earned revenue. For ATO purposes, WIP is treated as trading stock under ITAA 1997 s 70-10 if the firm is structured to hold work as an asset. However, most professional services firms with hourly-rate or cost-plus contracts use the percentage-of-completion model and carry a contract asset rather than trading stock.
Key bookkeeping tasks at month-end:
- Update the WIP schedule from timesheets or project cost reports
- Reconcile WIP balance to individual projects
- Write off irrecoverable WIP promptly — do not carry unbillable time as an asset
- Bill progress claims in line with contract milestones to avoid large unbilled balances at year-end
Progress Billing and Retentions
Many engineering contracts include a retention clause — typically 5–10% of each progress claim held back until practical completion. Retentions receivable should be tracked separately:
Dr Retention Receivable $25,000
Cr Revenue — Retention $25,000
Upon practical completion and release of retention:
Dr Accounts Receivable $25,000
Cr Retention Receivable $25,000
Professional Indemnity Insurance
Professional indemnity (PI) insurance is the single most important deductible for engineering and consulting firms. Under ITAA 1997, premiums paid to protect against claims arising from professional services are fully deductible in the year of payment (or apportioned if the policy spans financial years).
For annual PI premiums spanning the financial year-end, prepay the unexpired portion as a prepayment asset:
Dr Prepayments $4,500
Cr Professional Indemnity Insurance $4,500
(4.5 months unexpired at 30 June)
Other fully deductible professional costs: professional association memberships (Engineers Australia, AICD), CPD course fees, technical library subscriptions, software licences (engineering design, project management tools).
Business Structure Considerations
Engineering and consulting principals commonly operate through a discretionary trust with a corporate trustee, allowing income splitting to lower-taxed beneficiaries (within PSI rules). Where personal services income (PSI) rules apply under ITAA 1997 Part 2-42, income splitting is disallowed and the income is attributed back to the individual.
The 80/20 test matters: if more than 80% of income comes from one source, PSI rules likely apply. Bookkeepers should flag when a client's consulting income concentrates heavily with one engagement.
Company structures are increasingly common for larger practices. The 25% small business tax rate (aggregated turnover < $50M) makes a company attractive. Franked dividends from retained profits can be distributed when cashflow permits.
Reimbursable Disbursements — Gross vs. Net Treatment
Consultants frequently incur travel, accommodation, and out-of-pocket costs on behalf of clients. The bookkeeping treatment depends on the contractual arrangement:
- Principal arrangement (gross): The firm contracts for and pays the disbursement in its own name, then on-charges to the client. Revenue includes the reimbursement; the disbursement is an expense. Full gross flow-through on P&L.
- Agency arrangement (net): The firm acts purely as an agent — it recovers the exact cost. Only the fee component is revenue; the disbursement and recovery net to zero.
For GST: reimbursements under a principal arrangement carry GST; pure cost recoveries under an agency arrangement may not (the original supplier invoice already has GST). ATO GSTR 2000/37 provides guidance on this distinction.
Per-diem travel allowances paid to employees within ATO reasonable amounts (updated annually via Tax Determination TD 2026/5) do not require substantiation under s 900-30 ITAA 1997.
Overseas Project Revenue and Permanent Establishment
Australian engineering firms working on overseas projects must consider whether a permanent establishment (PE) arises in the foreign jurisdiction. Under most Australian tax treaties, a building site or construction/installation project constitutes a PE when it lasts more than 6–12 months (varies by treaty).
If a PE exists, the income attributable to it may be taxable in the host country. The Australian firm may still be required to include the income in its Australian return and claim a foreign income tax offset (FITO) under ITAA 1997 Div 770.
Bookkeepers should track overseas project duration, flag when the 6-month threshold is approaching, and ensure the tax agent is briefed before year-end.
Key Reference Points
- AASB 15 Revenue from Contracts with Customers — revenue recognition
- ITAA 1997 ss 70-10, 70-35 — trading stock (WIP treatment)
- ITAA 1997 Part 2-42 — personal services income rules
- ITAA 1997 Div 770 — foreign income tax offset
- ATO GSTR 2000/37 — GST and reimbursements
- ATO Tax Determination TD 2026/5 — reasonable travel allowances
- ATO TR 2002/10 — professional indemnity insurance deductibility