Trailing Commissions - Should I Give Back to Customer??

You beat me to my answer.
It is just a "referral fee" not a trailing commission (ie a one off payment). A lot of banks/financiers have this arrangements. 1% seems like a pretty good rate to me.

Check on the rules because I am pretty certain that you need to disclose that you get paid for the referral. Personally I would be inclined to do this anyway.
Often referred business does get a discount for the client also - though not always.

Personally, if you declare your financial interest in the recommendation, I see no ethical issues - but ethics is always a grey area....


Cheers
Blacky

Thanks Blacky, you have been a great help, really appreciate it. I will definately think about the disclosing bit.
 
You should disclose as your customer needs to know you have a financial interest in them accepting your recommendation.

Following the legislation last year, banks are tightening upon referral agreements and restricting them.
 
cu@thetop, you are a man of integrity.

Do you know if the bank gives them a better deal? If so then I can understand where you are coming from.

I feel I should recieve something for doing the five or ten minutes work (maybe $50) but then I think the rest should be given back to the customer for them to do what they want. I was thinking if you did this out of the blue it may further your sales as they would see you as having a high level of integrity. What do you think?

Thanks. I tell my clients to shop elsewhere for the best deal first, then take it to the referred broker to match or beat. I am not going to refer work to a complacent broker so my clients are treated just like the rest. I outlined this to the broker at the commencement so they know the rules. As I do the conveyancing for the client it is easy for me to chart how smoothly the deal travels. I don't know what 10-20 referrals a year translates to in $ terms but to be honest I don't care. The broker does refer me the odd conveyance or bottle of scotch so I suppose they are on the better end of the deal financially but all I want is happy clients. The upside to me is that my business is referral only and I don't advertise- I've already got too much work and am being forced to expand.
 
Always have been of the belief that you should only be paid for the time spent on a job. Of course there are differnt levels of expertise that you pay for per hour in $ terms but for me just spending 5 minutes passing on details, can that seriously be worth money?

I am all for passive income as that is what I have been working towards for the last 6 years but I had never thought of this before only because I guess the opportunity was not there before.

I can understand Mortgage Brokers getting trailling commissions as they actually do some hard yards to earn this but for just passing on a few details are you serious. No wonder things ending up costing a lot more. I knew there was always middlemen but I did not realise there was middlemen middlemen.

I was thinking if you gave it back to your client as a bonus then word would get out and then more people would buy the product I am selling as it would become cheaper to them. This may increase my sales.

you've guaranteed an income stream for a BANK.

if they want to pay you for that - for god's sake take some money back.

the cost to that customer is not going to change if you get a kickback.

this is standard industry practise and you would honestly be a fool to refuse it if you think you haven't 'earned' it. what you do with it is up to you - but you've definitely "earned it". just think of it as a very high hourly rate for your very precious time.

your idea about the sales is a good one - however, even if you offer them a percentage cashback and keep a majority for yourself, you will get th ebest of both worlds.

food for thought.
 
Could this come under fringe benefits? (I don't really have a clue about this one). I'd be inclined to donate it to a charity. It's tax deductable, so has negligible tax implications, it'll probably make the customers feel good about it, and you could even use it as an advertising point...

Dunno - when I rang the ATO about brokers rebating they said thats a new one and for it not to be included as income people had to get a special exclusion from the ATO on a case by case basis. So hopefully one of the rebate brokers can clear it up
 
you've guaranteed an income stream for a BANK.

if they want to pay you for that - for god's sake take some money back.

the cost to that customer is not going to change if you get a kickback.

this is standard industry practise and you would honestly be a fool to refuse it if you think you haven't 'earned' it. what you do with it is up to you - but you've definitely "earned it". just think of it as a very high hourly rate for your very precious time.

your idea about the sales is a good one - however, even if you offer them a percentage cashback and keep a majority for yourself, you will get th ebest of both worlds.

food for thought.

Aaron, am thinking of playing it out like cu@thetops post just above your one. This may be foolish in the short term but I am in this for the longterm and really short or long term I think if you maintain high standards of integrity you will be like cu@thetop where you will get so much work coming in that you could then choose what to do etc.

Thanks anyway for your thoughts.
 
The advice I've been given relating to rebates is that they should generally be declared as income (it would probably depend on the exact nature of the rebate though).

We've been looking into this in relation to the managed fund and insurance trailing commission rebate service we started last year. We tell people they should get their own tax advice since there doesn't seem to have been any ATO guidance given on this yet.
 
I went digging on the ATO website, dont know if this is of any use (dont know if the link would work so I cut and pasted). I think I'm reading this right in that if the income distributed to the partners is assessable. Noting partners here is in a different context.


http://www.ato.gov.au/rba/content.asp?doc=/RBA/Content/16023.htm


16023

Printable version
EDITED VERSION OF NOTICE OF PRIVATE RULING
Authorisation Number: 16023
This Ruling is a 'Private Ruling' for the purposes of Part IVAA of the Taxation Administration Act 1953.
YEAR(S) OF INCOME TO WHICH THIS RULING APPLIES:
Year ending 30 June 2002
TAX LAW:
Income Tax Assessment Act 1997 section 8-1.
Income Tax Assessment Act 1997 section 6-5.
WHAT THIS RULING IS ABOUT:
1. Is the rulee's share of rebates of commission to J organisation assessable income of the rulee?
2. If so, is the rulee's share of the payments of the rebates by J organisation to its clients deductible from the rulee's assessable income?
3. Are the rebates paid to J organisation, assessable income to those clients?
4. Is J organisation, a GST registered taxpayer, liable to GST on those rebates?

THE SUBJECT OF THE RULING:
The rulee is a partner, with another, in a partnership of solicitors and business lawyers. The rulee is considering entering a contract with a mortgage broker, and may also contract with other mortgage brokers, but all on the same terms.
Under the arrangement the rulee will refer clients seeking mortgage finance to a mortgage broker. The broker will locate suitable finance for the client from a range of lenders which it is anticipated will be mainly banks and major financial institutions.
The broker will receive a rebate from the lenders of varying amounts and structured in different ways. The most common structure will comprise a lump sum rebate from the lender to the broker on the loan being settled, with annual trailing fees to be paid during the term of the loan.
Under the terms of the proposed contract between the rulee, including the rulee's partner, and the broker part of those rebates will be paid to the partnership.
The rulee proposes to pass onto its clients all the rebates received by the partnership with no deduction for handling charges.
The rulee in conjunction with its partner is also seriously considering entering into retainers with the clients it refers to brokers on the basis that the partnership will charge the client the normal fees for acting on the mortgage and any associated transactions plus a component to cover the cost of handling the passing on of rebates.

COMMENCEMENT OF ARRANGEMENT:
30/06/2002
RULING:
1. Is the rulee's share of rebates of commission to J organisation assessable income of the rulee?
Yes.

2. If so, is the rulee's share of the payments of the rebates by J organisation to its clients deductible from the rulee's assessable income?
Yes

3. Are the rebates paid to J organisation's clients, assessable income to those clients?
The Commissioner is unable to answer this question as this question involves the taxation affairs of persons other than the rulee.

4. Is J organisation, a GST registered taxpayer, liable to GST on those rebates?
Yes.

EXPLANATION: (This does not form part of the Notice of Private Ruling)
Assessable income is divided into two categories:
(i) ordinary income (being income according to ordinary concepts) which is made assessable by section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997); and
(ii) statutory income which is made assessable by section 6-10 of the ITAA 1997 (being amounts made assessable under specific provisions of the ITAA 1997 or the Income Tax Assessment Act 1936).

Otherwise, sub-section 6-15(1) of the ITAA 1997 states that if an amount is not ordinary income, and is not statutory income, it is not assessable income.
Income according to ordinary concepts (ordinary income) is assessable income under section 6-5. Therefore the rulee's request requires consideration of the principle legislation, specifically Section 6-5 of the ITAA 1997.

The Australian Tax Handbook 1999 at p41 says
'Income according to ordinary concepts has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.''

In the present case the commissions paid by the broker will be received in consequence and as an incident of the carrying on of a business as a partner in a partnership. Whilst the rulee is a partner in a partnership which carries on a business as solicitors, the proposed arrangement is merely an extension of the activities conducted by the rulee.

It is the Commissioner's opinion therefore, that the commissions paid to the rulee as a partner in the partnership of J organisation will be assessable income.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, except to the extent they are losses or outgoings of capital or of a capital, private or domestic nature.

For a loss or outgoing to be deductible there must be a nexus between the loss or outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v FC of T (1949) 78 CLR 47; 8 ATD 431; (1949) 4 AITR 236).

Whether a taxpayer is entitled to a tax deduction depends upon the application of section 8-1 of the Act 1997, which provides:
'(1) You can deduct from your assessable income any loss or outgoing to the extent:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of
gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent:
(a) it is a loss or outgoing of capital, or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature; or
(c) it is incurred in relation to gaining or producing your exempt income; or
(d) a provision of this Act prevents you from deducting it.'
The Courts have, over a period of time, proposed various tests used in determining the true nature of an item of expenditure. These tests were reviewed by Dixon J in the High Court in the case of Sun Newspapers Ltd & Associated Newspapers Ltd v FC of T (1938) 61 CLR 337; (1938) 1 AITR 403; [1939] ALR 10 (Sun Newspapers Case). In Sun Newspapers Case Dixon J referred to British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205, where it was stated that the lasting nature of the expenditure was only relevant in assisting the court to decide whether the expenditure was on capital account or revenue account, as follows:
'In an attempt, by no means successful, to find some test or standard by the application of which expenditure or outgoings may be referred to capital account or revenue account the courts have relied to some extent upon the difference between an outlay which is recurrent, repeated or continual and that which is final or made once for all…'

A framework for determining whether a payment in any given case is on account revenue will be decided taking into account a number of principles. The principles are as follows:
1 The character of the "right" or "thing" (the terminology used in GP International Pipecoaters v. FC of T (1988) 19 ATR 1739; (1988) 88 ATC 4823) or "advantage" (the term used by Dixon J in Sun Newspapers Case) disposed of in exchange for the receipt.
2 Whether it is a flow detached from the asset or activity which generated it.
3 The periodicity, regularity or recurrence of the receipt or payment
These are the principles that must be considered before an item of expenditure can be considered for deductibility. In the absence of specific provisions within the ITAA 1997 or ITAA 1936 these principles must apply.

Thus in determining the nature of the rebate of commissions, it is considered that the essential character of the expenditure is such that the payments would be deductible.
The rebates of commission will be GST inclusive.

Disclaimer
The Register of Private Binding Advice is published as a public record of the binding advice issued by the ATO. Each piece of advice is based on a specific set of circumstances advised to the ATO and the law in force at the time of the advice, and is considered binding only in respect of the person/s or entity/ies on whose behalf the advice was sought. The Register is a historical record of advice provided, and is not updated to reflect changes in the law, withdrawal of advice or any other change in circumstance. Each piece of advice has been edited to avoid disclosing the identity of the person or entity on whose behalf advice was sought and published advice may therefore not disclose all the relevant facts or circumstances on which the advice was based. For these reasons, advice published in this Register cannot be relied upon as precedent for any other person or entity.
© Commonwealth of Australia 2011

This work is copyright. You may download, display, print and reproduce this material in unaltered form only (retaining this notice) for your personal, non-commercial use or use within your organisation. Apart from any use as permitted under the Copyright Act 1968 all other rights are reserved. Requests for further authorisation should be directed to the Manager, Commonwealth Copyright Administration, Intellectual Property Branch, Department of Communications, Information Technology and the Arts, GPO Box 2154, Canberra ACT 2601, or by email to [email protected]
 
Thanks Sim and Spectre and everyone for all your input into above thread. I really appreciate the different angles you get from asking questions on this forum.
 
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