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Edited version of private advice
Authorisation Number: 1051662877995
Date of advice: 22 April 2020
Ruling
Subject: Trailing Commissions and Emerging Profit Basis
Question
Can you calculate your taxable income, consisting of trail commissions from purchased mortgage books, on a profit emerging basis?
Answer
Yes. Trailing commissions do not represent ordinary income. They are receipts of money, which comprise a return in the form of a partial recovery of the investment (a return of capital) and a profit component. Only part of the receipts is considered income under Section 6-5 of the ITAA 1997. Therefore the assessment of profit on a profit emerging basis is considered to be the most appropriate method in determining your income for taxation purposes.
Question
Can the straight line amortisation method be used to calculate the emerging profit?
Answer
Yes. The Commissioner does not have a preferred method that should be adopted when using the profit emerging basis of assessment of income. Any method will suffice so long as it produces a substantially correct reflex of the taxpayer's true assessable income. Whether a method gives a substantially correct reflex and therefore is appropriate is a conclusion to be made from all the circumstances relevant to the taxpayer and the income.
This ruling applies for the following periods:
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
Year ending 30 June 2021
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You entered into a sale contract to acquire the right to receive trailing commissions from mortgage books that were held by the vendor prior to the sale.
You paid a single lump sum to acquire the mortgage books and the rights to receive an income stream in future years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5