Edited version of private advice

Authorisation Number: 1051720534991

Date of advice: 17 July 2020

Ruling

Subject: Capital gains tax - CGT event C2 Assessable income

Question 1:

Will the trailing commissions received from the loan book be made up of a return of a capital component and a profit component?

Answer:

Yes. Based on the information provided the purchase of the loan book was funded by capital, being debt in relation to the funds borrowed for the purpose of acquiring the loan book. Therefore, any receipts from collections will consist of a return in the form of a partial recovery of the capital and, in part, realise a profit.

Note: As your profit-making scheme extends over more than one income year, the assessment of the profit under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)on a profit emerging basis is considered to be the most appropriate method in determining income from the loan books for taxation purposes.

Question 2:

Is the right to receive trailing commissions from the loan book a capital gains tax asset under Subdivision 108-A of the ITAA 1997?

Answer:

Yes. In this case when the agreement to acquire the trailing commissions was entered, you acquired a legal chose in action giving you the right to receive a sum of money. The transaction was entered with the expectation of making a profit where the proceeds of collection exceeded the cost of the acquired right to receive trailing commissions from a loan book.

Therefore, the right is a legal right which is not property and is viewed as a capital gains tax (CGT) asset under section 108-5 of the ITAA 1997.

Question 3:

Will CGT event C2 occur when the trailing commissions are extinguished under section 104-25 of the ITAA 1997?

Answer:

Yes. As outlined above the right to receive the trailing commissions is viewed as being CGT asset under section 108-5 of the ITAA 1997, the same as a debt owed to you.

In this case when the trailing commissions are extinguished, such as through being repaid or refinanced, it is viewed that CGT event C2 occurs and the right ends, being that it has expired.

This ruling applies for the following periods

Income year ending 30 June 2019

Income year ending 30 June 2020

Income year ending 30 June 2021

Income year ending 30 June 2022

Income year ending 30 June 2023

The scheme commences on

1 July 2018.

Relevant facts and circumstances

Several years ago Trust A purchased a loan book for $XXX,XXX.00 as a going concern, funded using borrowed funds through a bank loan.

The seller was entitled to receive trailing commissions on the loans in the loan book at the time of sale, and to market and provide mortgage broking service to the borrowers of those loans.

Under the sale agreement the seller's right, title and interest in relation to the loans, the right to receive future trailing commissions and the right to market and provide mortgage broking services to the borrowers was transferred to you.

At settlement date, the loan book comprised of approximately $XXX,XXX,XXX.00 in loans, and commissions totally $XX,XXX.XX in the first month.

You, being Company A, are the trustee of Trust A and operate the mortgage broking business.

Some of the loans in the loan book has had their trailing commissions extinguished or Trust A has lost the client, such as by being repaid or refinanced. This has resulted in you no longer receiving income from those loans, with the total value of the loan book being reduced.

It is anticipated that more loans will be extinguished in future income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).