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Edited version of private advice
Authorisation Number: 1051756019747
Date of advice: 16 September 2020
Ruling
Subject: Income tax - income
Question 1
Can entity A calculate its taxable income, consisting of trailing commissions from purchased loan books, on a profit emerging basis?
Answer
Yes.
Under section 6-5 of the Income Tax Assessment Act 1997, your assessable income includes income according to ordinary concepts, which is called ordinary income.
In the company's specific circumstances, it is accepted that the receipt of trailing commissions received do not represent ordinary income. Rather they are receipts of money, which incorporate a mix of returned capital and profit.
Following the guidelines in paragraph 17 of Taxation Ruling TR 98/1 (Income tax: determination of income; receipts versus earnings), and having regard to the company's full circumstances, the Commissioner considers it appropriate to assess the income for taxation purposes on a profit emerging basis.
Question 2
Does the Commissioner have a preferred method of calculating the emerging profit?
Answer
No.
The Commissioner acknowledges that there is more than one basis of calculating the taxable income and does not have a preferred method that should be adopted when using the profit emerging basis. A method that produces a substantially correct reflex of the company's true taxable income is accepted.
For further information please see Australian Taxation Office Interpretative Decision (ATO ID) 2008/39 Acquisition of debt ledgers; ATO ID 2009/63 Assessable Income: securitisation arrangement - profit emerging basis of returning assessable income and ATO ID 2012/26 Deductibility of outgoings incurred for the acquisition of purchased pools of debts. These ATO IDs can be found on our website ato.gov.au.
This ruling applies for the following periods
Years ending 30 June 2021 to 30 June 2026
The scheme commenced on
1 July 2020
Relevant facts
Entity B and entity C are in the process of setting up entity A for the purpose of acquiring a loan mortgage business which will include acquiring the rights to trailing commissions which are part of an existing loan book.
Entity A will be a licenced financial service provider and will continue to carry on the loan mortgage business after it acquires the existing business.
Each of the different rights to trailing commission have a slightly different risk profile and effective life. All rights to commissions have the character that the institution that issued the loan established and an amount is paid based upon a formula per loan per institution.
It is expected that from the time that the rights are acquired it may take over xx years prior to being able to break-even (on a cash-flow basis) on the investment. It would be only after that time that a profit could be generated from the acquisition of the rights to the trailing commission.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5