Edited version of private advice

Authorisation Number: 1051982956084

Date of advice: 31 May 2022

Ruling

Subject: Trailing commissions - loan book - profit emerging basis

Question 1

Can you calculate your taxable income, consisting of trailing commissions from purchased loan books, on a profit emerging basis?

Answer

Yes.

The profit emerging basis is an appropriate method in determining your profit and assessable income from the right to receive trailing commissions form the Loan Book for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 2

Do the profit emerging calculations produce a substantially correct reflection of your assessable income?

Answer

Yes.

The emerging profit method of calculating the profit from your receipts of trailing commissions is appropriate because this method produces a substantially correct reflection of your income from trailing commissions received from the Loan Book. You can use this method to calculate the emerging profits from the trailing commission for income tax purposes.

This ruling applies for the following period:

Year ended June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 September 20XX

Relevant facts and circumstances

You are an incorporated propriety limited company.

Your business consists of acting as a mobile lender franchise who brokers loans/mortgages between customers and a financial institution. You receive commissions in respect of these business activities.

This income structure is typical across the mortgage brokering industry where the agreement is between the broker and an institutional financial entity. Specifically, trailing commissions are calculated, collated and paid out each month by an independent service provider who assists the brokers, ensuring they received the appropriate level of trail commission.

The average time between a refinanced loan is roughly 4.5 years based on industry averages. Loan books carry a significant amount of goodwill and value, being freely sold and purchased with no regulatory limitations on acquisition or sale of these books, making them common transactions within the industry.

You purchased a loan book from an independent third party during the year ending 30 June 2022. The purchase price takes into account factors including the trailing commissions likely to be received and the time value of money.

You will continually calculate the emerging profit of the Loan Book in the same manner until the cost base has been exhausted over the 4.5 years and it is confident that 100% of trailing commissions will be taxable.

The formula you use to calculate the net profit in respect of the debt ledgers on an emerging profit basis of assessment is as follows:

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Where:

A = Collections from ledger

B = Cost of ledger

C = Total anticipated collections form the ledger

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 4-15(1)

Income Tax Assessment Act 1997 section 6-5