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Ruling

Subject: Acquisition of trailing commission

Question 1

Will the trail rights be a non-deductible right to future income for the purposes of subsection 701-63(4)?

Answer

Yes.

Question 2

In determining the trail rights' market value for the purposes of Part 3-90, is it necessary to take into account the payment of ongoing remuneration to an adviser?

Answer

Not applicable.

Question 3

In determining the trail rights' market value for the purposes of Part 3-90, is it necessary to take into account any of the entity's operational expenses?

Answer

Not applicable.

Question 4

If the answer to 1 is "No", can the entity deduct the tax cost setting amount allocated to the trail rights in accordance with section 716-405?

Answer

Not applicable.

Question 5

Are there any other valuable rights under the agreement between the entity and the investors that will be treated as separate assets for the purposes of Part 3-90?

Answer

No.

This ruling applies for the following period

The scheme commenced

Before 12 May 2010

Relevant facts and circumstances

Before 12 May 2010, the head company of the tax consolidated group acquired all the shares in the subsidiary, together with its wholly owned Australian resident subsidiaries.

At the joining time the subsidiary was the operator and custodian of a financial services business for investors.

The form of agreement the subsidiary made with investors enabled it to charge investors various fees (including entry, exit, management and service fees) in respect of their investments.

One of these fees is an administration fee that must be paid by the investor on a monthly basis based on their average account balance over that month. This fee includes an amount payable to the investor's financial adviser and is negotiated between the investor and their financial adviser at the time of completing the application form.

The rights to future ongoing administration fees are referred to as "Trail Rights" in this notice of private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-90 (as amended by Tax Laws Amendment (2012 Measures No 2) Act 2012 (Part 4 in Schedule 3)

Income Tax Assessment Act 1997 section 701-63 of Tax Laws Amendment (2012 Measures No 2) Act 2012 (The Pre Rules Part 1 in Schedule 3)

Income Tax Assessment Act 1997, paragraph 701-63(3)(c)

Income Tax Assessment Act 1997, subsection 701-63(4)

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

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

Income Tax Assessment Act 1997, Division 705

Income Tax Assessment Act 1997, section 705-35

Income Tax Assessment Act 1997, section 716-405

Income Tax Assessment Act 1997, Division 230

Reasons for decision

Question 1

Will the trail rights be a non-deductible right to future income for the purposes of subsection 701-63(4)?

Answer

Yes.

Detailed reasoning

Subsection 701-63(5) operates in respect of subsections 701-63(4) and 701-63(6) of the Pre Rules.

Subsection 701-63(5) of the Pre Rules defines a right to future income as 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 a part of a Division 230 financial arrangement.

To the extent a subsection 701-63(5) right to future income is a subsection 701-63(4) non-deductible right to future income it will be treated as forming part of goodwill by subsection 701-63(2) and paragraph 701-63(3)(c). Subsection 701-63(4) defines a non-deductible right to future income as a right to future income that is not an unbilled income asset.

To the extent the subsection 701-63(5) right to future income is a subsection 701-63(6) unbilled income asset it may have its tax cost setting amount worked out under section 705-35 of Division 705 (on the basis of its relative market value at joining time), which is then set for the group's income tax purposes by subsection 701-55(5C).

Based on the information provided (and subject to the right having a market value of greater than nil at the joining time) the right of the subsidiary to receive administration fees from the investors is a subsection 701-63(5) right to future income in respect of which there is no subsection 701-63(6) unbilled income asset at the joining time.

As a result, the right of the subsidiary to receive ongoing administration fees from the investors is a non-deductible right to future income for the purposes of subsection 701-63(4) and is therefore treated as forming part of goodwill by subsection 701-63(2) and paragraph 701-63(3) (c).

Question 2

In determining the trail rights' market value for the purposes of Part 3-90 is it necessary to take into account the potential payment of ongoing remuneration to an advisor?

Answer

Not applicable.

Detailed reasoning

Refer to the response to Question 1.

As the right of the subsidiary to receive ongoing administration fees from the investors is a subsection 701-63(4) non deductible right to future income, treated as forming part of goodwill, there is no need to determine the market value of the rights (as separate assets) at the joining time.

The need to determine the market value of an asset at the joining time is required, if the asset is recognised as a separate reset cost base asset, in accordance with section 705-35 of Division 705 of the ITAA 1997, at this time.

As the rights are treated by subsection 701-63(2) and paragraph 701-63(3)(c) as forming part of the reset cost base goodwill asset for the purposes of the rules in Division 705 at the joining time (and are not recognised as separate assets at this time) there is no need to determine their market value (if any) at this time.

Question 3

In determining the trail rights' market value for the purposes of Part 3-90, is it necessary to take into account any of the subsidiary's operational expenses?

Answer

Not applicable.

Refer to the response to Question 2.

Question 4

If the answer to question 1 is "No", can the entity deduct the tax cost setting amount allocated to the Trail Rights in accordance with section 716-405?

Answer

Not applicable.

The effect of the Pre Rules is that only a subsection 701-63(6) unbilled income asset may have its tax cost setting amount set for the head company's income tax purposes by subsection 701-55(5C) and deducted under section 716-405.

As no subsection 701-63(6) unbilled income asset exists in respect of the "rights" held by the subsidiary at the joining time, no deduction is available under section 716-405.

Question 5

Are there any other valuable rights under the agreement between the subsidiary and the investors that will be treated as separate assets for the purposes of Part 3-90?

Answer

No.

Detailed reasoning

It is unlikely that any of the "rights" held by the subsidiary under its platform investor contracts (including the right to ongoing administration fees) have a market value (as separate assets) at the joining time.

To the extent any of these rights are alleged to have a market value of greater than nil however they would be subsection 701-63(4) non-deductible rights to future income, treated as forming part of goodwill.