Edited version of private advice

Authorisation Number: 1052377041562

Date of advice: 26 March 2025

Ruling

Subject: Upfront commissions

Question

Were Upfront Commission amounts received by X Co1 'derived' for the purposes of section 6-5 of the ITAA 1997 for the relevant income year, to the extent that X Co1 was contractually obligated to remit such amounts to third-party referrers?

Answer

Yes.>

This ruling applies for the following period

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY.

Relevant facts and circumstances

Background

X Co1 is a resident private company, which assists business clients with procuring finance. It does so through its X Co1 platform, which serves as an online marketplace to match its clients with lenders based on their specific requirements.

X Co1's role in its platform involves maintaining a network of lenders, facilitating the processing of finance applications through to settlement and entering arrangements with third party referrers.

The majority of X Co1's income is derived from upfront and trailing commission arrangements with lenders. It also receives facilitation fees from third-party referrers as payment for access to the X Co1 platform.

Broker agreements

As part of the operation of the platform, X Co1 enters agreements with various lenders (broker agreements). Such agreements relevantly contain 2 primary features:

•                     The lender will pay X Co1 an upfront commission as payment for introducing successful finance applicants through its employees or third-party referrers. Upfront commission is calculated as a percentage of the settled loan; and

•                     The lender or broker has a clawback period of 12 months. During this period, they may recover or set off upfront commission paid to X Co1 if a loan is discharged in full within 12 months. The upfront commission is typically 100% recovered by the lender or broker if the loan is repaid in full within 6 months.

Platform Service Agreements

Third-party advisers and brokers may apply to act as referrers to the X Co1 platform. Under such arrangements, the third-party referrer is given direct access to the X Co1 platform. They may refer potential business clients to X Co1 and are entitled to receive an amount calculated by reference to the upfront commission receivable by X Co1 on the broker contract.

Most third-party referrers enter into a Platform Service Agreement (PSA) with X Co1. Referrers receive a fee calculated on the basis of a specified percentage of the GST-exclusive upfront commission paid to X Co1 on settled finance enquiries. This is only payable to the referrer after X Co1 has received the upfront commission from the lender or broker.

The PSAs also contain a clawback period in reverse to those in the broker contracts. These provisions entitle X Co1 to recover the amount paid to referrers where the relevant lender or broker recovers, cancels, disputes, or claws back the upfront commission paid to X Co1. This takes place on a back-to-back basis.

During the 30 June 20YY income year (the relevant year), upfront commissions recognised and payments to third party referrers was XXX million and XXX million respectively.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Does Part IVA apply to this private ruling?

No.

Reasons for decision

Section 6-5 sets out what amounts are included in a taxpayer's ordinary income as follows:

(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income .

(2) If you are an Australian resident, your assessable income includes the * ordinary income you * derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

...

(4) In working out whether you have derived an amount of * ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

Subsection 6-5(4) and constructive receipts

The Explanatory Memorandum to the Income Tax Assessment Bill 1996 ("1997 EM") provides guidance about the meaning of the various provisions of the ITAA 1997 as originally enacted. Chapter 4 of the 1997 EM states the following about subsection 6-5(4):

Income that is not received [Subclauses 6-5(4) and 6-10(3)]

A generally accepted principle of tax accounting is that an amount accountable on a

receipts basis can be your income, even if it has not been actually received as soon as it is applied or dealt with in any way on your behalf or as you direct. In other words, an amount is treated as received as soon as the taxpayer gets benefit from it. This rule applies to both statutory income and ordinary income for amounts accounted for on a receipts basis. It is not limited to cases where a particular provision uses the word 'received' (e.g., it can apply where a provision uses the word 'derived' and the amount in question is properly accounted for on a receipts basis).

The Bill will explicitly state this principle, confirming what is generally accepted as one of the ordinary principles of tax accounting. Subclauses 6-5(4) and 6-10(3) will only have the effect of treating amounts as ordinary or statutory income when they are dealt with on your behalf or as you direct if they have all the attributes of ordinary or statutory income respectively, except that they have not been received.

Although subclause 6-5(4) is worded differently from subclause 6-10(3), the two provisions operate in the same way. Subclause 6-5(4) uses the word derived to describe when an amount with an income character comes home to you and thus becomes ordinary income. Subclause 6-10(3) does not use derived because the various timing tests for statutory income are generally different.

Example: On your instructions, your employer pays part of your wages to a health fund to meet your liability to pay health insurance contributions to the fund. You are taken to have received the amount when your employer paid it to the fund and, therefore, to have derived it as ordinary income then.

The Bill doesn't exclude any constructive receipt principle which extends beyond the rule set out in the subclauses.

The High Court explained the legislative intent of subsection 6-5(4) in Vlank v Federal Commissioner of Taxation [2016] HCA 42. French CJ, Kiefel, Gageler, Keane, Gordon JJ stated at [79]:

79. The object of s 6-5(4) is to prevent a taxpayer escaping the imposition of tax where, although income has not actually been paid to him or her, his or her resources have actually been increased "by the accrual of the income and its transformation into some form of capital wealth or its utilization for some purpose" [97] Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 at 430; [1971] HCA 48 quoting Permanent Trustee Company of New South Wales Ltd v Federal Commissioner of Taxation (1940) 2 AITR 109 at 110-111.

Application to facts

With regard to the issue of whether the third party referrers beneficially derived the specified percentage of upfront commissions due to them, we consider it helpful to consider the meaning of "beneficial entitlement".

The Australian Law Dictionary defines 'beneficial ownership' as follows:

'The right to the use and enjoyment of property, rather than to its bare legal ownership. For example, if property is held in trust, the trustee has the legal title, but the beneficiaries have the beneficial interest in equity. The beneficiaries, not the trustee, are entitled to any income from the property and will be taxed on this income and any chargeable gain arising if the property is sold.'

The English case J Sainsbury plc v O'Connor [1991] 1 WLR 963 at 969, 978 explained that the phrase "beneficial ownership"

"Means ownership for your own benefit as opposed to ownership as trustee for another. It exists either where there is no division of legal and beneficial ownership or where legal ownership is vested in one person and beneficial ownership or, which is the same thing, the equitable interest in the property in another."

In this case:

•                     The third party referrers were not beneficially entitled to the relevant amounts of upfront commissions received by X Co1. On the facts provided, the third party referrers do not receive any legal or equitable interest in any of the upfront commissions.

•                     It is not open to X Co1 to claim that third party referrers had beneficially derived amounts of upfront commissions as the agreements do not establish an express or implied trust.

A constructive trust is imposed by the court where the Court imposes a trust where one party acts unconscionably or inequitably to the detriment of another party relying on a previous agreement or joint endeavour: see Baumgartner v Baumgartner (1987) 164 CLR 137. In the present case, there is no evidence of any such conduct as between X Co1 and the third party referrers.

•                     There is no evidence to suggest that X Co1 and the third party referrers are in a partnership, whether express or implied. They are more aptly described as independent parties engaged in business with their own individual interests.

•                     There is no implied term in the Standard PSA that the parties are in a principal-agent relationship.

On the facts provided, the upfront commission amounts received by X Co1 are taken to have been derived by X Co1 alone for the purposes of section 6-5.