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Edited version of private ruling
Authorisation Number: 1011567662316
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Ruling
Subject: Lump sum payments for income stream
Question 1
Is the lump sum payment assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes. The lump sum payment is assessable income under section 6-5 of the ITAA 1997.
Question 2
If the payment is of a capital nature, will the trustee be eligible for the CGT discount provided for in Division 115 of the ITAA 1997?
Answer
As the payment is of an income nature the trustee will not be eligible for the CGT discount provided for in Division 115 of the ITAA 1997.
Question 3
If the payment is of a capital nature, will the trustee be eligible for the CGT Small Business Concessions provided for in Division 152 of the ITAA 1997?
Answer
Again, as the payment is of an income nature the trustee will not be eligible for the CGT Small Business Concessions provided for in Division 152 of the ITAA 1997.
Question 4
In which year(s) of income should the payment be accounted for?
Answer
The lump sum payments are ordinary income and assessable under section 6-5 of the ITAA 1997 and are assessable in the income year in which they are received.
This ruling applies for the following period<s>:
30 June 2008 to 30 June 2010
Facts
Finance Co entered negotiations to purchase the company holding the franchisee agreements and back office support functions. The purchase price included a sum to be paid to franchisees as compensation for the trail income on the loan book that would remain with the former owner.
Finance Co wrote to all franchisees outlining the proposal that franchisees surrender their right to ongoing trail commission in lieu of receiving payment from the Finance Co owned entity. Included in the letter was a deed to indicate acceptance of the proposal.
You were subsequently paid a lump sum amount as a trail payout in respect of a full and final settlement of all trailing commissions otherwise payable under the current agreement.
Trailing commissions are charged on any home loan which has been established with the aid of a mortgage broker and are paid to the mortgage broker by a bank or other mortgage provider. Trailing commissions are calculated as a percentage of the loan established and are generally paid monthly for the life of the loan.
Ruling
The nature of the payment
Income according to ordinary concepts has been held by the courts to include income from the rendering of personal services, income from property and income from the carrying on of a business. Trail commissions form a significant part of the income you derive in carrying on a business of a mortgage broker. These commissions form part of your assessable income under subsection 6-5(2) of the ITAA 1997.
The issue of whether the commutation of an entitlement to periodic payments to a lump sum affects assessability was considered in Coward v. FC of T 99 ATC 2166; 41 ATR 1138. In that case Mathews J found that payments made to replace income take on the character of the payment they replace and that the method of the payment does not alter the character of the payment. See also Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 442; (1952) 10 ATD 82.
Under your agreement with Finance Co. you were paid periodic trail commissions based on the loans which you established. Under the settlement contract with the new owner you were paid a lump sum in satisfaction of future trailing commissions to which you were entitled. Therefore this lump sum payment has the character of income because the trailing commissions themselves had the character of income. Future income has simply been converted to present income - as stated in paragraph 65 of Taxation ruling TR 92/3:
'Thus, an amount received for the transfer of a right to an income stream severed from the property to which it relates is income according to ordinary concepts. Future income is simply converted into present income. This is the case even if the income stream is produced by a contractual right rather than by the relevant property.'
Therefore the lump sum payment made by Finance Co. is assessable as ordinary income under section 6-5 of the ITAA 1997.
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