Private ruling: Trailing commissions - loan book
Date of advice: 25 November 2025
Published: 12 January 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can the taxpayer calculate its taxable income, consisting of trailing commissions from a purchased loan book (the Loan Book), on a profit emerging basis? | A1: Yes. | Q2: Can the taxpayer calculate its taxable income, consisting of trailing commissions from a purchased loan book (the Loan Book), using the straight-line method over 4.5 years? | A2: Yes.

Relevant facts and circumstances: You entered into a business sale agreement during the relevant income year to purchase a mortgage broking business. You are a licensed mortgage broker and have continued to carry on the business post-acquisition. The purchase price was allocated as follows: • The majority to "trail book and book debts" (representing the rights to trailing commissions under existing loan contracts brokered prior to acquisition) • A small amount to goodwill and other minor items. Trail books comprise client data, loan balances, repayment details, unused borrowing capacity, and importantly, the contractual rights to receive ongoing trailing commissions. Based on industry averages, loan lives are up to 30 years, but the effective average period until repayment/refinance is approximately 4.5 years. Based on the assumption above, the effective average period of 4.5 years means that by this time, it is likely that there are no remaining loans from the trail book acquisition. The applicant will receive trailing commissions during this time and would like to deduct the acquisition cost over this period so that the actual profit is reflected from an income tax perspective.

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

Reasons for decision: Summary: Your assessable income includes income according to ordinary concepts, which is called ordinary income (section 6-5 of the ITAA 1997). In Federal Commissioner of Taxation v. Stone [2005] HCA 21 (2005) 222 CLR 289 (2005) 2005 ATC 4234; (2005) 59 ATR 50, the majority judgment of the High Court considered the meaning of the phrase 'income according to ordinary concepts'. The court referred to the judgment in Scott v. Commissioner of Taxation (NSW) (1935) 3 ATD 142 at 144-145, where it was considered that in determining how much of a receipt should be treated as income, regard must be had to the ordinary concepts and usages of mankind. When you entered into the agreement to acquire a loan book, you acquired a legal chose in action giving you the right to receive trailing commissions. You entered into the transaction with the expectation of making a profit where the proceeds from the trailing commissions would exceed the cost of the acquired right to receive them. The consideration paid on acquisition of the right is funded by capital being either debt, equity or a mixture of both. Any receipts from collections therefore comprise a return in the form of a partial recovery of your investment (a return of capital) and a profit component. As such, the receipt of trailing commissions from the loan book purchased by you, do not represent ordinary income. They are receipts of money, rather than ordinary income, which incorporate a mix of returned capital and profit. Paragraph 17 of Taxation Ruling TR 98/1 ( Income tax: determination of income; receipts versus earnings ) states: "When accounting for income in respect of a year of income, a taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. A method of accounting is appropriate if it gives a substantially correct reflex of income. Whether a particular method is appropriate to account for the income derived is a conclusion to be made from all the circumstances relevant to the taxpayer and the income." In Federal Commissioner of Taxation v. Citibank Limited & Ors (1993) 44 FCR 434; (1993) 93 ATC 4691; (1993) 26 ATR 423 Hill J, in considering the relevance of accounting evidence in determining income tax issues, said: "Where there is no impediment in the Act to bringing to account a net profit as gross income, then that profit will need to be calculated in accordance with the accounting standards." In XCO Pty Ltd v. Federal Commissioner of Taxation (1971) 124 CLR 343; (1971) 71 ATC 4152; (1971) 2 ATR 353, the High Court considered the application of a profit emerging basis, where a taxpayer was assigned debts at a deep discount to their face value for consideration Gibbs J said: "Where the carrying out of a profit-making scheme extends over more than one year, the difference between receipts and disbursements in any one year may not give a true reflection of the profit arising or loss sustained in that year, and the assessment of profit on an emerging basis may be appropriate." The profit emerging basis is an appropriate method in determining the Taxpayer's profit and assessable income from the right to receive trailing commissions from the Loan Book for the purposes of section 6-5 of the ITAA 1997. Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings provides guidance on the accounting method likely to provide a substantially correct reflex of income in a relevant year. While this ruling is mainly concerned with distinguishing between a cash receipts basis and an earnings basis, it states the following at paragraph 17: When accounting for income in respect of a year of income, a taxpayer must adopt the method that, in the circumstances of the case, is the most appropriate. A method of accounting is appropriate if it gives a substantially correct reflex of income. Whether a particular method is appropriate to account for the income derived is a conclusion to be made from all the circumstances relevant to the taxpayer and the income. 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 trust's true assessable income. One method that can be adopted is the straight-line method.