Private ruling: Trailing Commissions and Emerging Profit Basis
Date of advice: 22 April 2020
Published: June 2020
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2016

Ruling: Q1: Can you calculate your taxable income, consisting of trail commissions from purchased mortgage books, on a profit emerging basis? | A1: Yes. Trailing commissions do not represent ordinary income. They are receipts of money, which comprise a return in the form of a partial recovery of the investment (a return of capital) and a profit component. Only part of the receipts is considered income under Section 6-5 of the ITAA 1997. Therefore the assessment of profit on a profit emerging basis is considered to be the most appropriate method in determining your income for taxation purposes. | Q2: Can the straight line amortisation method be used to calculate the emerging profit? | A2: 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 the taxpayer's true assessable income. Whether a method gives a substantially correct reflex and therefore is appropriate is a conclusion to be made from all the circumstances relevant to the taxpayer and the income.

Relevant facts and circumstances: You entered into a sale contract to acquire the right to receive trailing commissions from mortgage books that were held by the vendor prior to the sale. You paid a single lump sum to acquire the mortgage books and the rights to receive an income stream in future years.

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