Private ruling: Trailing commissions - loan book - profit emerging basis
Date of advice: 9 October 2023
Published: 20 November 2023
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the Commissioner accept your method of calculating its 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. The Commissioner does not have a preferred method that should be adopted when using the profit emerging basis of assessment of income. Any method will suffice so long as it produces a substantially correct reflex of your true assessable income.

Relevant facts and circumstances: You are an incorporated company acting as a Company A franchisee to broker loans/mortgages between clients and several banks across Australia. You receive up front commissions and trailing commissions by institutional lenders for brokering finance. Your entitlement to trailing commissions arises when the loan is made and settled and are calculated each month as a percentage of the average monthly balance of each loan. Your trailing commissions are paid monthly under an arrangement whereby an independent service provider aggregates and collects the commissions due to brokers on their behalf. Loan books comprise the mortgage broker's records of the borrowers (including their addresses, property details, loan balances, value of prospects, unused borrowing capacity. income and repayment details) as well as a non-compete agreement under which the mortgage broker agrees not to solicit or market financial products to the borrowers. Your purchase price varies depending on the loan books goodwill and value and gives you the right to receive trailing commissions and loan books from mortgage. Based on industry comparisons, loans may be for periods of up to 30 years however the average period until they are either repaid or refinanced is 4.5 years. Trailing commissions are thus, on average, payable each month for 4.5 years and depend on the average monthly balance of the loan based on these statistics. You are looking to purchase a loan book from a related party on an arms-length basis at a specified cost. The purchase price considers factors including the trailing commissions likely to be received and the time value of money. You applied a multiple of a specified amount to arrive at the loan books purchase price. Your current intention in respect of the acquired loan book is to retain entitlement & continue collecting the trailing commissions and service borrowers in the loan book. Where applicable, any refinances are removed from the acquired loan book and into their own portfolio.

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