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Edited version of private advice
Authorisation Number: 1051618922538
Date of advice: 12 December 2019
Ruling
Subject: Assessable Income
Question
Can you calculate your taxable income consisting of trailing commissions from the purchased loan book on a profit emerging basis?
Answer
Yes.
The company's profit-making scheme extends over more than one income year. The bringing to account for tax purposes of the difference between receipts and disbursements in any one particular income year will not give a true reflection of the profit or loss sustained for that year. The assessment of profit under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)on an emerging profit basis is therefore considered to be the most appropriate in determining your income for taxation purposes.
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
You are an incorporated company. You purchased a mortgage broking business from an unrelated party in the 20XX financial year. The purchase involved the acquisition of the unrelated party's loan book. The purchase involved you obtaining the rights to receive trailing commissions from the purchased trail commissions and loan book.
The loan books comprise the mortgage broker's records of the borrowers as well as a non-compete agreement under which the mortgage broker agrees not to solicit or market financial products to the borrowers.
Mortgage brokers are paid 'up front commissions' and 'trailing commission' by institutional lenders for arranging finance products, mainly housing loans. The agreements between the mortgage brokers and financial institutions are substantially the same across the industry.
The mortgage broker's entitlement to trailing commissions arises when the loan is made and settled and is calculated each month as a percentage of the average monthly balance of each loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5