Private ruling: Assessable income - trailing commissions
Date of advice: 5 October 2023
Published: 20 November 2023
Ruling period: 1 July 2020 to 30 June 2025
Date scheme commenced: 1 July 2020

Ruling: Q1: Will the Commissioner accept your method of calculating assessable income associated with the purchase of rights to trailing commissions and the subsequent recoupment of the purchase price and a profit component for the purposes of section 6 - 5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, it is assessable income under section 6 - 5 of the ITAA 1997. Whilst the Commissioner has considered the profit emerging basis as an appropriate method of determining assessable income, the Commissioner does not have a preferred method. You may adopt this method or any other appropriate method so long as it produces a substantially correct reflex of the taxpayer's true assessable income.

Relevant facts and circumstances: You offer a range of insurance products. You hold an Australian Financial Services Licence. In the normal course of business, the customers pay insurance premiums to the major insurance companies and you derive a commission based on the insurance policy(ies) written. The right to receive the commission initially belongs to the insurance broker that arranged the initial cover for an insured customer. The right to receive the commissions remains in existence for as long as the customer continues to renew the policy. The right to the trailing commission can be transferred or sold to another insurance broker that is an approved financial service provider. The subsequent holder of the right to trailing commissions can continue to receive the trailing commission until the insured customer cancels the policy or the policy lapses. On a specified date, you purchased rights to trailing commissions from a vendor. Under the contract, monthly amounts would be paid over a specified period until the total purchase price had been paid to the vendor. The monthly payments will continue to be paid for the remainder of the specified term. If the payments for the rights cease to be made by the purchaser, ownership of the rights will revert to the vendor. The insurance policies in existence at the time the right to the trailing commissions were acquired by you were required to continue to be processed by the purchaser. The purchase price was determined by you based on the rights existing at the time of purchase. Your basis for paying the rights to the trailing commission is that if the rights remained in existence for three to four years, you would recoup the expended amount on the purchase of the rights and the remainder would be a profit which would be assessable to the company. Covid-19 lockdowns that were imposed by State and or Federal authorities had impacted businesses across Australia that resulted in a temporary or permanent cessation of the policy holders' business operations. Customers that ceased their business operations had cancelled their insurance cover with the effect that the related rights to trailing commissions were lost.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5