Edited version of your written advice

Authorisation Number: 1012779309830

Ruling

Subject: Business of lending money

Question 1

Is the Company, as head company of a tax consolidated group, in the business of lending money in the years ended 30 June 2011 to 30 June 2020 for the purposes of paragraph  230-180(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The Company is the head company of a tax consolidated group.

A subsidiary company to the tax consolidated group funds loans to third parties.

The subsidiary company is not listed in the loan agreement as a party to the loan

A trust if formed over each loan funded by the subsidiary member.

The company engages another company to identify lending opportunities and to manage the loans.

A director of the Company approves the loans

Relevant legislative provisions

Division 6 of Part III of the Income Tax Assessment Act 1936

Section 230-180 of the Income Tax Assessment Act 1997

Section 701-1 of the Income Tax Assessment Act 1997

Section 703-15 of the Income Tax Assessment Act 1997

Section 703-25 of the Income Tax Assessment Act 1997

Section 703-30 of the Income Tax Assessment Act 1997

Section 960-130 of the Income Tax Assessment Act 1997

Section 960-135 of the Income Tax Assessment Act 1997

Section 995-1 of the Income Tax Assessment Act 1997

Reasons for decision

Paragraph 230-180(3)(b) of the ITAA 1997 provides that a taxpayer makes a loss from a financial arrangement from writing off, as a bad debt, a right to a financial benefit if the right is one in respect of money that the taxpayer lent in the ordinary course of their business of money lending.

Carrying on a business

'Business' is defined in section 995-1 of the ITAA 1997 to mean any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

The taxation legislation does not provide any guidance for determining whether a taxpayer is carrying on a business. There is a considerable amount of case law on the meaning of 'carrying on a business', which has identified a number of indicators for determining whether a person is carrying on a business.

The Commissioner's view on the meaning of 'carrying on a business' is stated in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), which provides the following list of indicators of carrying on a business that the courts consider relevant (at paragraph 13):

• whether the activity has a significant commercial purpose or character…;

• whether the taxpayer has more than just an intention to engage in business…;

• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity…;

• whether there is repetition and regularity of the activity…;

• whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business…;

• whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit…;

• the size, scale and permanency of the activity…; and

• whether the activity is better described as a hobby, a form of recreation or a sporting activity….

In each case, whether activities amount to 'carrying on a business' is a question of fact to be determined by weighing all the relevant indicators.

Carrying on a business as a money lender

Whether a taxpayer is carrying on a business of lending money is a question of fact.

In Federal Commissioner of Taxation v Marshall and Brougham Pty Ltd 87 ATC 4522; 18 ATR 859 Bowen CJ made the following observations on determining whether a taxpayer is a money lender (at ATC 4528-4529):

It is generally accepted that in order to be regarded as carrying on a business one must demonstrate continuity and system in one's dealings. In the case of money lending it has been said that a person must hold himself out as willing to lend money generally to all and sundry (subject to credit-worthiness): see Litchfield v. Dreyfus [1906] 1 KB 584. It is not decisive whether the lender is a registered money-lender or not, although this will be a factor to take into account. It should be mentioned that it need not be the only business or the principal business of the taxpayer. It will be insufficient, however, if it is merely ancillary or incidental to the primary business. In the end, it will be a question of fact for the court to decide by looking at all the circumstances involved: see Newton v. Pyke (1908) 25 TLR 127.

In Taxation Ruling TR 92/18 Income tax: bad debts, the Commissioner provides his view on 'who is a money lender' for the purposes of taxation legislation. After quoting the above comments of Bowen CJ, the Commissioner goes on to state the following on determining whether a taxpayer is a money lender:

44. The frequently quoted statement of Farwell J in Litchfield v. Dreyfus [1906] 1 KB 584 at p. 589 that:

'Speaking generally, a man who carries on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible'

should not restrict the meaning of 'money-lender' for taxation purposes in light of the more recent Australian cases of Fairway Estates Pty Ltd v. F.C. of T. (1970) 123 CLR 153, 70 ATC 4061, 1 ATR 726; F.C. of T. v. Marshall and Brougham Pty Ltd (supra); and F.C. of T. v. Bivona Pty Ltd 90 ATC 4168, 21 ATR 151.

45. These recent cases have highlighted the differences between the laws relating to the control of money-lenders and the laws relating to the taxing of money-lenders… Litchfield v. Dreyfus (supra) was a case under the Moneylenders Act 1900 (UK) and not under a taxing statute.

46. Accordingly, …, a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be sufficient if the taxpayer lends moneys to certain classes of borrowers provided the taxpayer does so in a businesslike manner with a view to yielding a profit from it.

For the head company of a consolidated group to be treated as in the business of money lending, the consolidated group must have a member who carries on a business of money lending, and the money lending activities must be with entities that are not members of the consolidated group. The single entity rule (section 701-1 of the ITAA 1997) deems subsidiary members of a tax consolidated group to be parts of the head company of the tax consolidated group rather than separate entities. As a consequence, the actions and transactions of a subsidiary member are treated as having been undertaken by the head company, and the assets of a subsidiary member are taken to be owned by the head company.

All loans were with unrelated third parties.

The private ruling application states that the Company, as head of a tax consolidated group, is in the business of money lending as a consequence of one of its wholly owned subsidiaries being in the business of lending money. However, the terms of the loan agreements provided as evidence of the loans, show that the wholly owned subsidiary is not a party to the loan agreements. Rather, another company is listed as the lender (Lending Company).

For each loan, the wholly owned subsidiary provides moneys to the Lending Company to fund the loan, and the Lending Company declares a trust over the money, to the effect that it holds it on trust for the benefit of the wholly owned subsidiary. The wholly owned subsidiary has total beneficial ownership in the trust property.

The effect of the lending arrangement is that for each loan, the Lending Company, as trustee of the trust declared over loan money, is the lender of the money.

Item 2 of the table in subsection 703-15(2) of the ITAA 1997 and item 1 of the table in section 703-25 of the ITAA 1997 collectively state that a trust can be a subsidiary member of a consolidated group if the trust is a resident trust estate for the income year for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), and the trust is a wholly-owned subsidiary of the head company of the group.

Section 703-30 of the ITAA 1997 provides that an entity (the subsidiary entity) is a wholly-owned subsidiary of another entity (the holding entity) if all the membership interests in the subsidiary entity are beneficially owned by the holding entity, or one or more wholly-owned subsidiaries of the holding entity.

Item 3 of the table in subsection 960-130(1) of the ITAA 1997 states that a member of a trust is any beneficiary, unit holder or object of the trust.

Subsection 960-135 of the ITAA 1997 states that a membership interest is each interest, or set of interests in the entity or each right or set of rights in relation to the entity, by which you are a member of the entity.

In order for a trust to be a wholly-owned subsidiary of the head company of a consolidated group, all the membership interests in the trust must be beneficially owned by either the holding entity and/or one or more wholly-owned subsidiaries of the holding entity.

As there is a declaration of trust over each of the loan moneys held by Lending Company, it is reasonable to conclude that the wholly owned subsidiary is the sole object of each trust, and will be a member of each trust. It would follow that the wholly owned subsidiary, as the sole member of each trust, has a right or an interest in each trust estate and its income and therefore owns all the membership interests in each trust.

As such, all the membership interests in each of the trusts declared by Lending Company over loan moneys are beneficially owned by a wholly-owned subsidiary of the Company, making each of the trusts declared by Lending Company over loan moneys a wholly-owned subsidiary of the Company, and subsidiary members of the tax consolidated group.

Accordingly, each loan made by Lending Company, as trustee of the trusts declared over loan moneys, will be treated as a loan of the Company for tax purposes. The provisions of Division 6 of Part III of the ITAA 1936 that would ordinarily apply to tax the net income of each separate trust estate (each trust declared by Lending Company over loan money) will not apply, as the single entity rule will treat the income of each trust as income of the Company.

Whether the Company, as head of a tax consolidated group, is carrying on a business of money lending in regards to the loans is a question of fact.

Although each loan entered into by Lending Company (in its capacity as trustee of each loan money) is a separate lending activity, with each loan there is more than an intention to engage in business, there is an intention to profit, the activities are carried out in a businesslike manner, and the activities have a significant commercial purpose. The amount of money loaned, the rates of interest charged, and the amount of income accrued are considered to demonstrate the commercial intent of the Company in making the loans, their intention to profit, and that they had more than intention to carry on business.

Notwithstanding that the Company contracts another company to manage the loans, each loan is funded by the wholly owned subsidiary, and each loan is approved by a director of the Company.

Upon considering the factors listed in TR 1997/11, it is considered that the Company is carrying on a business of lending money for the purposes of paragraph 230-180(3)(b) of the ITAA 1997.