Edited version of private advice

Authorisation Number: 1052285939291

Date of advice: 5 August 2024

Ruling

Subject: Trailing commissions

Question

Will the Commissioner accept your method of calculating assessable income associated with the purchase of rights to trailing commissions and the subsequent recoupment of the purchase price and a profit component for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, it is assessable income under section 6-5 of the ITAA 1997. Whilst the Commissioner has considered the profit emerging basis as an appropriate method of determining assessable income, the Commissioner does not have a preferred method. You may adopt this method or any other appropriate method so long as it produces a substantially correct reflex of the taxpayer's true assessable income.

This ruling applies for the following period:

1 July 20xx to 30 June 20XX

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

The Taxpayer operates a mortgage broking business assisting customers obtain home loans, personal loans, car loans, asset finance and commercial lending.

The Taxpayer acquired the right to receive trailing commissions from Entity A.

The Taxpayer acquired all the units in Trust C which holds the rights to receive trailing commissions from Entity B.

The acquisitions were completed through a specified number of payments totalling $xxx to an unrelated entity.

Due to the relationship with the aggregator Entity B, the sale had to be completed by the purchase of the units in Trust C which then entitled the Taxpayer to the future trailing commission income.

The Taxpayer intends to retain the business for future income therefore there are no plans to sell the rights.

The loan book is the portfolio of customers that have an active loan written by the broker (or in this instance the previous broker). The lender pays the Aggregator a trailing commission which is typically xx% (pa but paid monthly) of the outstanding loan balance net of any offset each month. Whilst the loan remains active with that lender the trailing commission is payable to the broker through the Aggregator as the intermediary

The loan books to which the trailing commissions relate contain loans opened as far back as a specified year. The Taxpayer anticipates the average loan is about xx years or longer.

Entity A and Entity B (as Aggregator's) receive the money from the lenders prior to paying it to the Taxpayer.

The Entity B loan book has a total value of $xxx and the Entity A loan book has a total value of $xxx.

Trailing commissions from both Entity A and Entity B are paid monthly.

The trailing commission revenue generated differs slightly depending on the outstanding balance of customers lending. Month 20xx payment was $xxx ex GST for Entity B and $xxx ex GST for Entity A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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