Private ruling: Trailing commissions
Date of advice: 28 July 2025
Published: 29 September 2025
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: DD MM 20XX

Ruling: Q1: Can you determine the component of your assessable income, consisting of annual and trailing commissions received from purchasing trailing commission rights, on a profit emerging basis? | A1: Yes. The Commissioner accepts that the profit emerging basis is an appropriate method in determining your profit and assessable income from the right to receive trailing commissions from the loan books for the purposes of section 6-5 of the ITAA 1997. | Q2: If the answer to Question 1 is 'yes', does the Commissioner accept the profit emerging methodology you have provided produces a substantially correct reflex of your assessable income? | A2: Yes. The Commissioner accepts that the emerging profit method of calculating the profit from your receipts of trailing commissions is appropriate as this method produces a substantially correct reflex of income from trailing commissions received from the loan books. You can use this method to calculate the emerging profits from the trailing commissions for income tax purposes.

Relevant facts and circumstances: You are an Australian proprietary company. You are a mortgage broker earning commissions from financial institutions from facilitating loan applications, predominately home loan applications. Your income earned from your business is derived mainly from 2 types of commissions: • Upfront commissions: Paid upon loan approval at settlement; and • Trailing commissions: Calculated and paid each month as a percentage of the average monthly balance of the loan. The source and rate of a trailing commission is derived from a document called a 'debt ledger' or 'loan book' which is a ledger of loans that a broker will accumulate and manage. You purchased the business assets of another mortgage broking business on DD MM 20XX. The principal asset you purchased was the right to receive ongoing commission trails from financial institutions in respect of X separately identified loan books. The transaction was entered into with the expectation of making a profit whereby the proceeds of collection would eventually exceed the costs of acquiring the right to receive the trailing commission. The life of a home loan can range up to 30 years, however, where a loan is refinanced, it is classified as a new loan. The average time between a refinanced loan is now around X years based on industry average. When a loan is refinanced, brokers are able to move loans into their other book where circumstance allows. Proposed calculation Possible methods that could be adopted include the straight line, the first in/first out (FIFO) methodologies and a formula used in the calculation of income from debt ledgers: A - (A x B / C) Where: A = Collections from the ledger or loan book; B = Cost of the ledger or loan book; C = Total anticipated collections from the loan book or ledger. You consider the emerging profit basis of assessment produces the most substantially correct reflex of the net profit from the trailing commissions.

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