Edited version of your written advice

Authorisation Number: 1013066727636

Date of advice: 10 August 2016

Ruling

Subject: Peer-to-peer money lending service

Question 1

Are the Portfolio Units or Pool Units issued by the Fund considered 'debt interests' as defined in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

If the Portfolio or Pool Units are debt interests, are they debt interests which give rise to a debt deduction within subsection 820-40(1) of the ITAA 1997?

Answer

Not necessary to answer given our answer to Question 1.

This ruling applies for the following period(s)

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

The scheme commences on

The scheme has commenced

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Fund is a unit trust which is intending to register as a managed investment scheme under the Corporations Act 2001 (Corporations Act) and operate a peer-to-peer money lending service.

In addition to operating an online facility for Unitholders and Borrowers (the Platform), the Responsible Entity will perform identity checks, arrange for execution of loan agreements, collect payments from Borrowers and make distributions to Unitholders. The Platform will make use of the infrastructure developed by its parent company but will be tailored to the Australian market.

Potential Unitholders (i.e. individuals, companies, incorporated associations, trusts and institutions) will subscribe for Units in the Fund through two investment options, Portfolio Units and Pool Units (collectively referred to as Units). The terms of these Units are governed by the Constitution of the Fund, and the terms upon which the Units will be issued to Unitholders will be governed by a Subscription Agreement between the Responsible Entity and each Unitholder. The key features of the Fund are set out below.

Units in the Fund are created by dividing the Application Money by the Issue Price on the date the Units are issued. Units may be issued in fractions. In subscribing for Units a potential Unitholder must apply for a number of Units with a total Issue Price equal to or greater than the Minimum Holding, lodge a completed application with payment, specify how many Portfolio Units (i.e. interests in a Portfolio) and Pool Units (i.e. interests in a Pool) are being subscribed for and, in respect of Pool Units, specify the Pool for which it wishes the Units to be issued.

Where an application accepted by the Responsible Entity is for Portfolio Units:

• the Application Moneys for the Units shall be credited to the Unitholder's Portfolio (i.e. the Assets held by the Responsible Entity for the Unitholder); and

• the Application Moneys shall be held as Cash in the Unitholder's Portfolio, unless and until the Unitholder specifies Fractions to be acquired (meaning fractional interests in Loans provided by the Fund to Borrowers) and the Loans to which the Fractions relate are advanced in accordance with the Constitution; and

• the applicant shall be issued with the Portfolio Units at an issue Price of $X per Portfolio Unit.

Each Unitholder's Portfolio Units are of a different class to each other Unitholder's Portfolio Units.

Where an application accepted by the Responsible Entity is for Pool Units, the Application Moneys for the Units shall be added to the relevant Pool (i.e. a pool of Assets of the Fund) and the applicant shall be issued with the Pool Units at an Issue Price equal to the Pool Unit Price plus Transaction Costs. The Pool Units for each Pool are of a different class to the Pool Units of each other Pool.

Once the Responsible Entity has received from Unitholders valid requests to acquire all of the Fractions with respect of a Loan, the Responsible Entity will (unless it is not reasonably practicable to do so within 14 days):

• deduct the Fraction Face Value in respect of each Fraction from the relevant Unitholders' Portfolios (thereby reducing the amount of Cash in those Portfolios);

• allocate the Fractions to the relevant Unitholders' Portfolios; and

• (via the Custodian of the Fund) advance the Loan to the Borrower.

The Responsible Entity may, in its absolute discretion, also acquire Fractions on behalf of a Pool.

The Loans will be in the form of secured and unsecured personal loans for a term of up to 5 years. Loans will be advanced by the Fund to multiple Borrowers. Each Borrower will enter into a loan agreement with the Custodian of the Fund, being the lender of record, which will act upon instructions given by the Responsible Entity in relation to the Loans.

On receipt of a repayment (including all amounts of principal and interest) in relation to a Loan, the Responsible Entity must apply the repayment against any remuneration payable to the Responsible Entity under the Constitution, any interest which is due and payable in respect of the Loan and any principal which is due and payable in respect of the Loan, in such order and proportions as the Responsible Entity may determine.

For each Fraction in respect of a Loan which is held in a Unitholder's Portfolio, on receipt of a repayment in relation to that Loan the Responsible Entity must, within 14 days after its receipt:

• credit an amount equal to the Fraction's proportionate share of the repayment (after the payment of any fees and expenses) as Cash in the Unitholder's Portfolio; and

• to the extent the increase in Cash relates to the interest component of the repayment, issue additional Portfolio Units to the Unitholder in respect of the increase in the Cash in the Unitholder's Portfolio.

To the extent the repayment constitutes a repayment of principal there will be no change to the number of Portfolio Units held by the Unitholder as the increase in Cash in its Portfolio will be offset by a corresponding reduction in the Fraction Face Value.

On receipt of a repayment in relation to a Loan, the Responsible Entity must, for each Fraction in respect of the Loan which is held in a Pool, credit to the Pool an amount equal to the Fraction's proportionate share of the repayment (after the payment of any fees and expenses) in Cash in the Pool.

The Responsible Entity may, in its absolute discretion, allow a Unitholder in a Portfolio containing one or more Fractions to request the Responsible Entity to realise a Fraction in the Unitholder's Portfolio. Where the Responsible Entity, in its absolute discretion, accepts such a request it must:

• realise the Fraction for an amount equal to the Fraction Face Value; and

• cancel the Fraction and credit the Unitholder's Portfolio with Cash equal to the Fraction Face Value.

Such a realisation will not change the number of Portfolio Units held by the Unitholder.

Similarly, where the Fraction Face Value of a Fraction is zero as a result of the receipt of repayments in respect of a Loan, the Responsible Entity will cancel the Fraction (without changing the number of Portfolio Units held by the Unitholder).

A request for redemption of Units can be made in accordance with the Constitution.

While the Fund is a registered managed investment scheme and ASIC Relief permits redemption of Pool Units in the Fund, a Unitholder may request the Responsible Entity to redeem any Pool Units held by the Unitholder in accordance with any current withdrawal offer in respect of Pool Units of the class held by the Unitholder made by the Responsible Entity in accordance with Part 5C.6 of the Corporations Act (as amended by the ASIC Relief) and the Constitution.

A Unitholder has no right to withdraw Pool Units from the Fund under the Constitution if there is no withdrawal offer currently open for acceptance by Unitholders. The Responsible Entity is not at any time obliged to make such a withdrawal offer, but must satisfy requests that are to be satisfied within 21 days after the withdrawal offer closes. Pool Units redeemed are to be redeemed at the Redemption Price applicable on the date the withdrawal offer closes (i.e. the Pool Unit Price on the date the withdrawal offer closes less Transaction Costs).

Where ASIC Relief permits redemption of Portfolio Units in the Fund, a Unitholder may request (through the Platform) the Responsible Entity to redeem any Portfolio Units in respect of Cash held by the Unitholder in their Portfolio. A redemption request in respect of Portfolio Units must be for a Redemption Amount which is less than or equal to the Cash in the Unitholder's Portfolio.

If acting on the redemption request would result in the Unitholder holding Units less than the Minimum Holding, the Responsible Entity may reject the request. The Responsible Entity need not redeem any Units if the value of the Units to be redeemed is less than the Minimum Holding, unless the request relates to the balance of the Units held.

The Redemption Amount in respect of a withdrawal request of Portfolio Units under the Constitution must be paid to the Unitholder within 5 days of the Responsible Entity receiving the redemption request (except where prevented from doing so because of the act or omission of some other person in connection with the redemption). If a Unitholder has made a redemption request in respect of Portfolio Units in accordance with the Constitution and the Responsible Entity accepts the redemption request, the Responsible Entity must redeem Portfolio Units with a total Redemption Price equal to the Redemption Amount and pay the Redemption Amount to the Unitholder.

On the redemption of Units the Responsible Entity must cancel the Units redeemed.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 820-40(1)

Income Tax Assessment Act 1997 Division 974

Income Tax Assessment Act 1997 subsection 974-5(1)

Income Tax Assessment Act 1997 section 974-15

Income Tax Assessment Act 1997 subsection 974-15(1)

Income Tax Assessment Act 1997 subsection 974-20(1)

Income Tax Assessment Act 1997 paragraph 974-20(1)(c)

Income Tax Assessment Act 1997 section 974-135

Income Tax Assessment Act 1997 subsection 974-135(1)

Income Tax Assessment Act 1997 subsection 974-135(3)

Corporations Act 2001

Corporations Act 2001 Part 5C.6

Reasons for decision

Question 1

The provisions of Division 974 of the ITAA 1997 determine whether, for certain income tax purposes, an interest is a 'debt interest' or an 'equity interest' for tax purposes. These provisions do not impose tax, but rather categorise whether an interest is debt or equity based on "economic substance rather than mere legal form" (subsection 974-5(1) of the ITAA 1997).

A scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) of the ITAA 1997 in relation to the entity (subsection 974-15(1) of the ITAA 1997).

Subsection 974-20(1) of the ITAA 1997 provides that a scheme satisfies the debt test in relation to an entity if:

(a) the scheme is a *financing arrangement for the entity; and

(b) the entity, or a *connected entity of the entity, receives, or will receive, a *financial benefit or benefits under the scheme; and

(c) the entity has, or the entity and a connected entity of the entity each has, an *effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when:

(i) the financial benefit referred to in paragraph (b) is received if there is only one; or

(ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and

(d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and

(e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil.

The classification of a scheme as giving rise to a debt interest is done from the perspective of the issuer of the interest, in this instance the Responsible Entity.

For the purposes of paragraph 974-20(1)(c) of the ITAA 1997, section 974-135 of the ITAA 1997 sets out the rules for determining whether an obligation to take an action under a scheme is an "effectively non-contingent obligation". The relevant parts of section 974-135 in the context of the Units are:

There is an effectively non-contingent obligation to take an action under a *scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation (see subsections (3), (4) and (6)) to take that action.

An obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a *connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation.

The Responsible Entity's requirement to pay amounts to the Unitholder in respect of a Unit will be contingent on the Responsible Entity receiving amounts (principal and interest) from the Borrower(s) in respect of the one or more Loans in respect of which the Unitholder acquires a Fraction.

While a Unitholder may request the realisation of a Fraction in their Portfolio or a redemption of their Units, the amounts payable by the Responsible Entity to the Unitholder in satisfaction of such requests is contingent, as applicable, on either the Fund's acceptance of the request; an existing withdrawal offer in respect of Pool Units of the relevant class; or the Responsible Entity's receipt of amounts from the Borrowers in respect of Loan(s) in which the Unitholder has a Fraction.

At the time of issuing the Units to a Unitholder, each of the Responsible Entity's future obligations to make payments (i.e. provide financial benefits) to the Unitholder in respect of those Units are therefore contingent on an event, condition or situation other than the ability or willingness of the Responsible Entity to meet the obligation.

As such, at the time the Units are issued the Responsible Entity will not have an effectively non-contingent obligation to provide a financial benefit under the arrangement and the requirement set out in paragraph 974-20(1)(c) of the ITAA 1997 will not be satisfied. The Units (both Portfolio and Pool) issued by the Fund will therefore not satisfy the debt test in subsection 974-20(1) of the ITAA 1997, and will not constitute a debt interest as defined in section 974-15 of the ITAA 1997.

Question 2

It is not necessary to answer this question as we consider that Portfolio Units and Pool Units issued by the Fund will not constitute debt interests as defined in section 974-15 of the ITAA 1997.