Rebates of commission from investment brokers
Those schemes on which product rulings have been issued are often advertised by investment brokers. In some instances, potential participants are offered a rebate of some, or all, of the commissions the investment broker will receive from the promoter of the scheme once the participant has been accepted into the scheme.
The tax treatment of these rebates in the hands of the participant will depend on the tax treatment of participants in the product ruling that was issued in relation to the scheme.
Where a commission rebate is directed to a taxpayer other than the participant who has claimed the initial deductions, and where the other taxpayer pays a lower rate of tax on the assessable rebate income, consideration will be given to whether or not this feature may trigger Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) (see also, High profit margins).
Carrying on a business
If the product ruling indicates the participant is carrying on a business, in relation to their participation in the scheme, any commission rebate received will be assessable income of the participant in the year of receipt. The participant will need to include the commission rebate they receive from the investment broker as income from the business activity in their relevant income tax return. If a participant is entitled to receive a rebate or a similar payment, and the participant directs the payment of such an amount to be made to another entity, this amount will also be included in the participant's assessable income in the year the other entity receives it.
Passive investment
If the product ruling indicates the participant is not carrying on a business in relation to their participation in the scheme, any rebate, commission or similar payment the participant receives from the promoter is assessable income of the participant in the year received. Any rebate, commission or similar payment received by the participant from any other entity as a result of their participation in the scheme, will also be assessable income of the participant in the year received. Any rebate, commission or similar payment received as a result of their participation in the scheme, and which the participant directs be made to another entity, will be included in the participant’s assessable income in the year the other entity receives it.
Land impairment
Taxpayer Alert TA 2008/11 Land Impairment Trust Arrangement describes land impairment trust arrangements associated with managed investment schemes. These arrangements involve the sale of land at an impaired value by a member of a group of entities that are treated as a consolidated group for income tax purposes.
Oversize partnerships
We will not rule on schemes which result in an oversize common law partnership, as this type of arrangement is prohibited by section 115 of the Corporations Act 2001.