Edited version of private advice

Authorisation Number: 1052402672119

Date of advice: 29 May 2025

Ruling

Subject: Trailing commissions

Question 1

For the purposes of section 6-5 of the Income Tax Assessment Act 1997, can you determine its assessable income from trailing commissions on a profit emerging basis, using the specified methodology that it plans to adopt?

Answer 1

Yes. The Commissioner does not have a preferred method that should be adopted when using the profit emerging basis of assessment of income. The specified methodology will suffice as it produces a substantially correct reflex of the company's assessable income.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

20XX

Relevant facts and circumstances

You operate as a mobile brokering and mortgage lending business. You write loans on behalf of a bank.

Upon a successful loan application supplied to the bank and a formal approval issued to the mortgagee, you are paid a commission which is bifurcated into two sources from the bank:

•                     Upfront commission - commissions paid upon a successful application approval from the bank, and

•                     Trailing commission - commissions paid over the life of the loan where you continue to actively manage and maintain the loan.

The commission structure is common practice throughout the industry and is the main structure with which a broker and a financial institution set up their engagement. It is the main source of a broker's revenue. Trailing commission is calculated, aggregated, and paid out each month from the financial institution with the assistance from an independent service provider, who assists the broker to ensure the correct level of commission is paid.

The formula used to calculate trailing commission payments is sourced from a document called a loan book. The loan book is a summary ledger of all the loans a broker has accumulated from successful approvals and currently actively managed. The loan book maintains its existence and value based on the length of the loans within the book, and the value of these loans. The lifespan of a loan is integral to calculating the ongoing trailing commission earned by the Company.

A typical home loan ranges anywhere from 25 to 30 years. However, when a loan is refinanced, it is typically treated as an entirely new loan with different characteristics. Based on industry averages, the typical home loan is refinanced between every 4 to 5 years.

Due to the significant level of funds under management (FUM) at any one point in time, these books carry significant earnings potential and a stable source of declining but recurring revenue for brokers. Due to this loan books are often sold and purchased between brokers with no regulatory limitations on acquisition or sale. This allows for brokers to quickly grow their businesses though the purchases of additional loan books, making them commonplace transactions.

Where the broker purchases a new loan book, they take on the responsibility of servicing the borrowers and are entitled to the ongoing trailing commission of the respective loan book. Furthermore, a broker can refinance loans from a purchased loan book into their existing loan book where circumstances fit.

You purchased a new loan book last year and have provided details of cost and expected annual trailing commission.

You are considering adopting the formula for an Emerging Profits Basis and an average term loan.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 6-5

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