Edited version of your private ruling

Authorisation Number: 1012560884677

Ruling

Subject: Rights to future income

Question 1

Does the right to receive trail commission from Lender as held by Aggregator as at the joining time (pursuant to the Lender Agreement) in respect of loans introduced by Broker and settled by Lender before this time, meet the definition of an unbilled income asset pursuant to subsection 701-63(6) of the pre rules?

Answer

No.

However the right to receive a maximum amount of relevant percentage of this trail commission (payable by Lender to the Aggregator Trust) as held by Aggregator at the joining time pursuant to the Broker Agreement will meet the definition of an unbilled income asset under subsection 701-63(6) of the pre rules.

Question 2

For the purposes of Part 3-90 does subsection 701-63(5) operate so that the Lender Agreement gives rise to a single asset being the right to all future trail commissions as opposed to a separate asset in relation to each loan or only one asset comprising rights to all trailing commissions in relation to all Lender Agreements?

Answer

N/A. Refer to the response to Question 1 (above)

Question 3

For the purposes of Part 3-90 does paragraph 701-63(5)(b) require Aggregator's obligations to pay trail commission to brokers to be taken into account in determining the market value of the right at the joining time?

Answer

N/A. Refer to the response to Question 1 above

It is noted however that if the relevant right were that in respect of the lender agreement (being the right to receive 100% of the trail commission under this agreement on loans brokered by Broker before the joining time) then the obligation to pay Broker at least certain percentage of this trail commission under the Broker Agreement would need to be taken into account in determining the market value of the right.

Question 4

Are there any other valuable rights under the agreement with lenders that will be treated as separate assets for the purposes of Part 3-90 under subsection 701-63(5)?

Answer

The question has been withdrawn.

Question 5

Is Aggregator's right to trail commission from Lender (in respect of the loans successfully brokered by Broker prior to the joining time) covered by section 716-410 so that subsection 701-55(5C) applies in relation to that asset?

Answer

N/A. Refer to the response to Question 1 above and Question 6 below

Question 6

If the answer to questions 1 and 5 is YES, then will section 716-405 apply to the tax cost setting amount of the subsection 701-63(6) unbilled income asset (as set by subsection 701-55(5C) so that the head company can deduct in accordance with paragraph 716-405(2)(b)?

Answer

Yes.

Relevant facts and circumstances

The head company acquired the mortgage management or distribution business via the acquisition of all the shares in subsidiary. As a result acquired entity together with all of its wholly owned subsidiaries became subsidiary members of the consolidated group. The wholly owned subsidiaries included the mortgage aggregator.

Mortgage aggregators (or broker platforms) have developed in Australia, over the past 20 years, due to the growth in the mortgage broking industry combined with changes in the lending and remuneration practices of the major financial institutions.

According to the Australian Competition and Consumer Commission mortgage aggregators or broker platforms provide accredited brokers with access to the products of a range of lenders and also provide infrastructure (technology systems and software) and administrative support, education and training, communication and marketing assistance to member brokers. The aggregator organises a panel of lenders (or enters into lender agreements), facilitates processing of applications and enters into commission sharing arrangements with broker members. Many mortgage brokers are aligned to a distribution platform/aggregator service. Broker platforms generally have commission-splitting arrangements with brokers and derive revenue by retaining a fee from broker's commission payments.

The agreements are as follows:

The Lender Agreements

The aggregator enters into these agreements on behalf of its finance broker members. The lender agreements allow the accredited and approved finance broker (in its capacity as nominee, introducer or originator member of the aggregator) to introduce customers (submit completed applications for finance) to the lender in return for up-front and trail commission (from the lender) if a loan is made by the lender to the customer as a result of the application submitted.

Each lender agreement sets out the terms and conditions under which the mortgage broking services are to be provided; lists the products (types of loans) offered by the lender that the broker may "sell" to a customer; the commission rates (including trail commission rates) payable by the lender and the terms and conditions under which the commission will be paid.

As noted above, the aggregator enters into these agreements on behalf of its finance broker members with all such agreements allowing or providing for the mortgage broking services to be carried out by a specified accredited and approved nominee (introducer or originator-member) of the aggregator. Although the products offered to customers and the commission rates/terms provided to brokers by different lenders may vary, it seems the terms (obligations and conditions) under which a broker member of the aggregator may become an authorised and accredited nominee do not.

The Broker-Member agreements

The finance broker enters into an agreement with an aggregator allowing the broker to introduce customers (submit completed loan applications) to the panel of lenders organised by the aggregator and utilise the training, administrative and marketing services of the aggregator in return for a share (5% - 20%) of the up front and trail commission paid by the lender to the broker.

According to the Mortgage and Finance Association of Australia (MFAA) for a mortgage broker to be able to introduce loans to (and be paid commission by) a lender they would normally need to work with an aggregator. The reason for this is that most lenders have volume and compliance requirements that the average broker would be unable to sustain unless they were a large business. Even then, the broker might only be able to maintain the volume required in respect of a few lenders and would need to employ staff to manage the compliance requirements. Many aggregators also allow the broker to operate under its credit license (noting the National Consumer Credit Protection Act 2009, introduced on the 1 July 2010, requires the credit licensing of all mortgage brokers). In this regard the aggregator performs a similar role to the "dealer group" entity in the financial services industry that holds the Australian Financial Services License.

From a review of the broker-member agreements provided for this case, it is apparent the role or operations of aggregators may vary from the provision of mortgage bulking services for a fee to full service franchise/licensing arrangements in return for a share of the commission paid by the lender. No employer/employee, partnership, joint venture or agency relationship is created between the parties (on entering into the broker-member agreement). Broker members will (in many cases) be carrying on a separate business and providing mortgage broking services (as part of that business) but under the Aggregator business name (or brand).

Relevant legislative provisions

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1997, subsection 701-55(5C) of the pre rules

Income Tax Assessment Act 1997, subsection 701-63(5) of pre rules

Income Tax Assessment Act 1997, paragraph 701-63(5)(b) of pre rules

Income Tax Assessment Act 1997, paragraph 701-63(5)(c) of pre rules

Income Tax Assessment Act 1997, subsection 701-63(6) of pre rules

Income Tax Assessment Act 1997, paragraph 701-63(6)(a) of pre rules

Income Tax Assessment Act 1997, paragraph 701-63(6)(b) of pre rules

Income Tax Assessment Act 1997, section 716-405 of pre rules

Income Tax Assessment Act 1997, subsection 716-405(2)(a) of pre rules

Income Tax Assessment Act 1997, subsection 716-405(2)(b) of pre rules

Income Tax Assessment Act 1997, section 716-410 of pre rules

Income Tax Assessment Act 1997, Division 230

Sub-Item 104(2) of Sch 1 of Part 3 Tax Law Amendment (TOFA) Act 2009

National Consumer Credit Protection Act 2009

Reasons for decision

Question 1

Does the right to receive trail commission from Lender as held by Aggregator as at the joining time (pursuant to the Lender Agreement) in respect of loans introduced by Broker and settled by Lender before this time, meet the definition of an unbilled income asset pursuant to subsection 701-63(6) of the pre rules?

Answer

No.

However the right to receive a maximum amount of relevant percentage of this trail commission (payable by Lender to Aggregator Trust ) as held by Aggregator at the joining time pursuant to the Broker Agreement will meet the definition of an unbilled income asset under 701-63(6) of the Pre Rules.

Reasons

The first step in determining whether the relevant right meets the definition of a subsection 701-63(6) unbilled income asset is to determine whether it is a *right to future income as defined in subsection 701-63(5). This is because a subsection 701-63(5) right to future income asset must first exist before it may be determined whether (all or any part of) this *right to future income asset meets the conditions in paragraphs 701-63(6)(a) and (b).

It must first be determined therefore if Aggregator holds a right to future income as defined in subsection 701-63(5) of the Pre Rules in respect of the broker's right to receive trail commission from Lender (for loans successfully brokered before the joining time).

Subsection 701-63(5)

Subsection 701-63(5) applies to a valuable right (including a contingent right) to receive an amount for the performance of work or services or the provision of goods if:

(a) the valuable right forms part of a contract or agreement; and

(b) the market value of the valuable right (taking into account all the obligations and conditions relating to the right) is greater than nil; and

(c) the valuable right is neither a *Division 230 financial arrangement nor part of a Division 230 financial arrangement.

As at the joining time Aggregator was a party to the lender agreement with Lender. The agreement provides that Aggregator may perform the mortgage broking services through a nominee subject to that nominee being approved (authorised) and accredited by Lender.

The trail commission payable by Lender (on loans introduced by a broker) is set out in the agreement which provides that trail commission at the rate of relevant percentage pa will be paid on all home loans and lines of credit of certain amount and over on and from the 1^st anniversary of the date of funding.

As at the joining time Broker was a member of the Aggregator group in accordance with the Broker Agreement. The agreement states that Aggregator carries on the business of providing an integrated IT platform, panel of lenders and administrative support for members of the network. The agreement also states that Broker wishes to become a member of the Aggregator network in accordance with the Agreement.

The effect of the Broker Agreement is such that on becoming a member of Aggregator network Broker became an authorised and accredited nominee of Aggregator in respect of the Lender Agreement. With regard to the commission payable by a lender to a broker (on loan applications successfully submitted by that broker) the Broker Agreement provide as follows:-

· [Aggregator} will direct the lender to pay all commissions (due to the brokers on loans introduced and settled by the lender) to the (trustee of) the Aggregator's Trust

· [Aggregator] agrees….. that Aggregator will be entitled to receive a maximum amount of relevant percentage of the total up-front and trail Commission received from the lender (and paid to the Aggregator's Trust)

· [Aggregator] acknowledges that any Commission held by the Trustee for the Broker in accordance with the provisions of the Agreement is beneficially held by the Broker and other than any claw back provided for in this Agreement [Aggregator] shall not have any right of set-off against such monies

As noted above, as at the joining time Aggregator was a party to the lender agreement with Lender, noting that this agreement allowed for authorised and accredited nominees (of Aggregator) to provide loan broking services (in return for commission). It is further noted that Aggregator enters into agreements with a number of lenders in order to provide a panel of lenders to its broker members, or as part of its business of providing an integrated IT platform, panel of lenders and administrative support for members of the Aggregator network, pursuant to the Broker Agreement. It may be argued therefore that the effect of the Broker Agreement is such that Aggregator enters into the agreements with lenders in its capacity as aggregator, not mortgage broker. In return for providing an integrated IT platform, panel of lenders and administrative support to its members Aggregator is entitled to receive (or retain) a maximum amount of relevant percentage of the total up-front and trail commission paid by the lender to the broker (pursuant to the Broker Agreement).

As Aggregator carries on the business of mortgage aggregator (not broker) and enters into the lender agreements in its capacity as aggregator, the agreement with Lender (the right to receive trail commission in respect of loans brokered by Broker under this agreement) is not the relevant right nor agreement for subsection 701-63(5) or (6) purposes. This is because Aggregator is a party to the Lender agreement in its capacity as aggregator not broker and in its capacity as aggregator it doesn't have a right to receive 100% of this trail commission income. In its capacity as aggregator Aggregator has a right to receive (or retain) a maximum amount of relevant percentage of the trail commission payable by Lender in respect of loans successfully brokered by Broker prior to joining time.

The relevant right for subsection 701-63(5) and 701-63(6) purposes is the right of Aggregator to receive an amount for aggregator services provided to Broker (before the joining time), this right forming part of the Broker Agreement with Broker (not the lender agreement with Lender).

It is the view of the applicant that because Aggregator is a party the Lender agreement and is contractually entitled to receive payments of commissions from the lender that (notwithstanding the effect of the Broker Agreement) it is also beneficially entitled to 100% of this income. It is submitted that because the aggregator is (arguably) allowed to recognise an asset for accounting purposes equal to the present (fair) value of all trail commission payable by lenders on loans originated by brokers before the financial reporting time that Aggregator (as aggregator) derives 100% of this trail commission as section 6-5 ordinary assessable income on actual calculation and payment by the lenders. With regard to the Broker Agreement (the direction to the lender to pay all commission due to the brokers into the Aggregator Trust) the applicant has advised that this is simply an application of funds (commission) already (beneficially) derived by Aggregator for income tax purposes.

The ATO do not agree with this. To have the character of section 6-5 ordinary income an item must be a gain by the taxpayer who derived it and there is no gain unless an item is derived by the taxpayer beneficially (per the judgement of Dixon J in The Countess of Bective (1932) 47 CLR 417). Although Aggregator may be contractually (legally) entitled to all of the trail commission payable by the lenders (under the lender agreements) it has no beneficial entitlement to all of this commission. The beneficial entitlement of the aggregator for income tax purposes is clearly limited (or determined) by the Broker Agreement. It is limited by the fact Aggregator has entered into the lender agreement(s) on behalf of its broker members (in its capacity as aggregator) and the fact it is only entitled to a small percentage (not more than relevant percentage) of this trail commission income.

Although for accounting purposes the aggregator (arguably) may be allowed to recognise an asset equal to the present (fair) value of trail commission payable by lenders on loans originated at the reporting time this is not determinative of the section 6-5 ordinary assessable income tax treatment nor the identification of the relevant right (nor services nor contract of which this right forms a part) for subsection 701-63(5) and subsection 701-63(6) of the Pre Rules purposes

The relevant right for subsection 701-63(5) and subsection 701-63(6) of the Pre Rules is the right of Aggregator to receive (no more than) relevant percentage of the trail commission payable by Lender to Broker (in respect of loans brokered before the joining time) being in respect of aggregator services provided to Broker before the joining time and forming part of the Broker Agreement with Broker.

The *Division 230 financial arrangement exclusion in 701-63(5)(c)

Applicant has advised that it made an election under sub-item 104(2) of Schedule1 Part 3 of Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 to apply Division 230 to all financial arrangements it started to have before the start of its first applicable income year. As the right to receive an amount for aggregator services provided at the joining time (being equal to a maximum of relevant percentage of all trail commission payable by Lender on loans originated before this time) prima facie meets the definition of a *financial arrangement (as defined in section 230-45) the right will therefore not be covered by 701-63(5) due to the exclusion in 701-63(5)(c).

As a result the advice in this ruling is limited to the relevant period.

Question 2

For the purposes of Part 3-90 does subsection 701-63(5) operate so that the Lender Agreement gives rise to a single asset being the right to all future trail commissions as opposed to a separate asset in relation to each loan or only one asset comprising rights to all trailing commissions in relation to all Intermediary Agreements

Answer

N/A. Refer to the response to Question 1 (above)

Question 3

For the purposes of Part 3-90 does subsection 701-63(5)(b) require Aggregator's obligations to pay trail commission to brokers to be taken into account in determining the market value of the right at the joining time

Answer

N/A. Refer to the response to Question 1 above

It is noted however that if the relevant right were that in respect of the Lender agreement (being the right to receive 100% of the trail commission under this agreement on loans brokered by Broker before the joining time) then the obligation to pay Broker at percentage of this trail commission under the Broker Agreement would need to be taken into account in determining the market value of the right.

Question 4

Are there any other valuable rights under the agreement with lenders that will be treated as separate assets for the purposes of Part 3-90 under subsection 701-63(5)?

Answer

The question has been withdrawn.

Question 5

Is Aggregator's right to trail commission from Lender (in respect of the loans successfully brokered by Broker prior to the joining time) covered by section 716-410 so that subjection 701-55(5C) applies in relation to that asset

Answer

N/A. Refer to the response to Question 1 above and Question 6 below

Question 6

If the answer to questions 1 and 5 is YES, then will section 716-405 apply to the tax cost setting amount of the subsection 701-63(6) unbilled income asset (as set by subsection 701-55(5C) so that the head company can deduct in accordance with paragraph 716-405(2)(b).

Answer

Yes.

Please refer to the response to Question 1.

The 701-63(6) unbilled income asset (held by Aggregator at the joining time) is the right of Aggregator to receive (retain) no more than relevant percentage of the trail commission payable by Lender on loans successfully brokered by Broker prior to the joining time.

This 701-63(6) unbilled income asset will receive a tax cost setting amount (under section 703-35) based on its (relative) market value at the joining time. This tax cost setting amount will then be set by subsection 701-55(5C) meaning section 716-405 may apply to the asset after joining time.

Section 715-405 allows the tax cost setting amount of the 701-63(6) unbilled income asset to be deducted

(a) in full in the joining income year IF the head company expects that a recoverable debt for the services mentioned in 701-63(6) and at least equal to the tax cost setting amount of the 701-63(6) asset will arise within 12 months after the joining time (paragraph 716-405(2)(a)); OR

(b) otherwise (if paragraph (a) does not apply), then the deduction for the tax cost setting amount (in the income years subsequent to the joining income year) is limited to the recoverable debt (or debts) that arise for the 701-63(3) asset in these subsequent income years.(paragraph 716-405(2)(b).

A recoverable debt for the 701-63(6) asset will arise each time Lender is required to calculate and pay the trail commission (ie monthly).

Paragraph 716-405(2)(a) will not apply as a recoverable debt for the asset at least equal to its tax cost setting amount will NOT arise within 12 months of the joining time.

The head company must therefore deduct the tax cost setting amount under paragraph 716-405(2)(b).

Note: It is expected that only a small part of the tax cost setting amount of the subsection 701-55(5C) asset will be deducted in the income year.

Note: this ruling only applies for the relevant period.

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