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Edited version of private advice
Authorisation Number: 1052045870339
Date of advice: 19 October 2022
Ruling
Subject: Business income - loan book - emerging profit basis
Question
Can you calculate your taxable income from a purchased loan book on a profit emerging basis?
Answer
Yes. The profit emerging basis is an appropriate method for the taxpayer to calculate taxable income from the right to receive trailing commissions from the loan book for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The trustee for the Trust (the Trust) acquired a loan book in the 20XX financial year for the value of $X.
The loan book carries with it a right to receive trailing commissions.
The purchase price takes into account factors including the trailing commissions likely to be received and the time value of money.
The acquisition of the loan book carries with it the right to receive trailing commissions from the loans.
The Trust entered into the transaction with the expectation of making a profit where the proceeds from the trailing commissions would exceed the cost of the acquired right to receive them.
The consideration paid on acquisition of the right [to receive trailing commissions] is funded by way of transfer of property equal in value to the value of the loan book.
Any receipts from collections will comprise a return in the form of a partial recovery of the investment, being a return of capital and a profit component.
The average time between a refinanced loan is roughly 4.5 years based on industry averages.
The Trust will continually calculate the emerging profit of the loan book on a straight line basis until the cost base has been exhausted over the 4.5 years. The Trust is confident that 100% of trailing commissions will be taxable.
Relevant legislative provisions
Income Tax Assessment Act 1997 subsection 4-15(1)
Income Tax Assessment Act 1997 section 6-5