Edited version of your written advice

Authorisation Number: 1013079635134

Date of advice: 26 August 2016

Ruling

Subject: Business of lending money

Question 1

Are you conducting a business of lending money for the purposes of paragraph 230-180(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) and entitled to a deduction under subsection 230-15(2) of the ITAA 1997 for bad debts written off?

Answer

Yes

Question 2

Are you conducting a business of lending money for the purposes of paragraph 25-35(1)(b) of the ITAA 1997 and entitled to a deduction under subsection 25-35(1) of the ITAA 1997 for bad debts written off?

Answer

Not required to be considered.

Question 3

Alternatively, are you entitled to a deduction for bad debts written off under section 8-1 of the ITAA 1997?

Answer

Not required to be considered.

This ruling applies for the following periods:

1 July 2014 to 30 June 2015

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 20YZ

Relevant facts and circumstances

You were incorporated for the purpose of providing financial support to a group of entities (the Group) which includes your consolidated group.

You provide a significant number of loans to entities within the Group, each of which bear interest at commercial rates.

You are the head company of a consolidated group for income tax purposes.

Your subsidiaries were incorporated to provide loans to entities external and internal to the Group. The loans provided by your subsidiaries also earn a commercial rate of interest.

The activity undertaken by the consolidated group in relation to providing loans is profitable.

Funds to provide loans may be drawn from within the Group or be sourced from external financiers.

An independent committee considers each loan made by members of the consolidated group and determines the level of risk. The rate of interest and whether guarantees are required depends on the nature of the investment the funds will be used for and the level of risk.

All loans made by members of the consolidated group are monitored on a regular basis given their significant value to the group. The monitoring process between internal and external loans is similar.

The status of each loan is included in formal board reports. These reports are presented for review and consideration by a committee as part of the monitoring process.

You have a credit recovery process in place. Where loans are made within the group the process is less formal, however steps will be taken to maximise the prospects of recovery of the debt. This includes periodic review of debts and taking mitigating action by having regard to the underlying assets of the borrower. Where a doubtful debt arises from actions of an external party legal action will be taken, where appropriate.

You and your subsidiaries are not registered as a moneylender.

You and your subsidiaries operate no other businesses.

Gains and losses from your financial arrangements are assessed under Division 230 of the ITAA 1997 (relating to the Taxation of Financial Arrangements (TOFA) regime).

The intention for the foreseeable future for you and your subsidiaries is to continue to carry on the same activities as outlined above.

Assumptions

1. None of the rules described in the table in subsection 25-35(5) of the ITAA 1997 apply to affect your entitlement to deductions under subsection 230-15(2) and/or subsection 25-35(1) of the ITAA 1997.

2. The scale and depth of the activities of your consolidated group, as outlined in the relevant facts and circumstances, will continue to be undertaken by the consolidated group for the period to which this ruling applies.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-35

Income Tax Assessment Act 1997 subsection 25-35(1)

Income Tax Assessment Act 1997 paragraph 25-35(1)(b)

Income Tax Assessment Act 1997 subsection 25-35(5)

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 subsection 230-15(2)

Income Tax Assessment Act 1997 subsection 230-20(4)

Income Tax Assessment Act 1997 subsection 230-180(3)

Income Tax Assessment Act 1997 paragraph 230-180(3)(b)

Income Tax Assessment Act 1997 subsection 230-180(4)

Income Tax Assessment Act 1997 paragraph 230-180(5)(b)

Income Tax Assessment Act 1997 section 701-1

Income Tax Assessment Act 1997 section 701-5

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

You are conducting a money lending business for the purposes of paragraph 230-180(3)(b) of the ITAA 1997 and any loss you make in respect of bad debt written off in relation to loans made in the ordinary course of that business will be deductible under subsection 230-15(2) of the ITAA 1997.

Detailed reasoning

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

In order to realise a loss under subsection 230-180(3) of the ITAA 1997 it is therefore necessary to demonstrate that the entity is carrying on a business as a moneylender and that the bad debt related to money which was lent in the ordinary course of that business.

Carrying on a business as a moneylender

Generally, the requirements to be considered to be carrying on a business as a moneylender are similar to those required for carrying on of a business.

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. The factors that are considered important in determining the question of business activity are:

• 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 regularity and repetition of the activity

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

• whether the activity is planned, organised and carried on in a businesslike manner such that it is described as 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 sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression.

Taxation Ruling TR 92/18 provides the Commissioner's view in relation to the deductibility of bad debts. Whilst the ruling considers this in relation to the ITAA 1936, the same principles apply in respect of the ITAA 1997.

TR 92/18 reiterates that the question of whether a business of money lending is being carried on is a question of fact. It also indicates that in assessing the facts a moneylender may not necessarily need to be willing to lend to the public or a wide class of borrowers. Further, the taxpayer may lend to only certain classes however this must be done in a businesslike manner with a view to yielding a profit from that activity.

Relevant case law

Bowen CJ in FC of T v. Marshall and Brougham Pty Ltd 87 ATC 4522: 18 ATR 859 (Marshall and Brougham's case) made the following observations regarding a business of money lending:

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 order to demonstrate that an entity is carrying on the business of money lending, Tamberlin J stated in Richard Walter Pty Ltd v FC of T 95 ATC 4440 that:

…it is not enough merely to show that a person has on several occasions lent money at remunerative rates of interest; there must be a certain degree of continuity and system about the transactions. The activity should be capable of being described as business operations intended to yield a profit.

In Fairway Estates Pty Ltd v. Federal Commissioner of Taxation (1970) 123 CLR 153; 70 ATC 4061; (1970) 1 ATR 726, Barwick CJ said that 'provided there is an intention to carry on a money lending business, such a business can exist even though only one loan has been made'. Therefore, it is possible for an entity to carry on a money lending business with only a few borrowers.

In Federal Commissioner of Taxation v. Bivona Pty Ltd (1990) 21 FCR 562; 90 ATC 4168; (1990) 21 ATR 151 (Bivona), the taxpayer company was incorporated for the purpose of borrowing money overseas ($4m in Swiss francs) for use by a group of companies of which it was a member. It was concluded that the taxpayer's principal business was money lending as approximately 83% of the taxpayer's gross income was interest received from the holding company and a further 7% was interest received from unrelated companies. The loan to the holding company yielded a profit (that is, the interest received exceeded the interest paid to the overseas lender), and the fact that the loans were made to related entities was not determinative.

Application of the law to your circumstances

For the head company of a consolidated group to be treated as being 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 under 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 assets of a subsidiary member are taken to be owned by the head company and the actions and transactions of a subsidiary member are treated as having been undertaken by the head company, including (because of the entry history rule under section 701-5 of the ITAA 1997) those actions that happened before it became a subsidiary member (refer to paragraph 4 of Taxation Determination TD 2005/23). Therefore, the activities of the subsidiary entities within your consolidated group are relevant and will also be considered in the reasons below.

Business purpose and character, commerciality, and profit making intention

All entities in the consolidated group have, since their establishment, continually undertaken significant money lending activities.

The primary activity of both subsidiaries, since their establishment, has been to lend money to entities outside the consolidated group. The establishment of the relevant facilities to fund loans under commercial terms, and the process undertaken by the investment committee to approve the provision of loans is representative of a business of money lending.

The activities undertaken by the consolidated group show elements of repetition and regularity in running a money lending business. The number of loans issued over the years demonstrates that no loan was a single and isolated transaction. Collectively, the loan assets and cash on hand within the consolidated group represent virtually the entire assets within the group.

The internal procedures adopted within the consolidated group in respect of the making of new loans, and the close periodic monitoring of existing loans and credit recovery procedures, also represent the businesslike and systematic way that the lending operations are being conducted. Notwithstanding that the loans provided by the consolidated group are to entities linked to but not within the group, the level of process and rigour applied is consistent with the conduct of a business of money lending.

As to the commerciality of the loans made by the members of the consolidated group to other entities, it is noted that these loans will generate interest revenue for the consolidated group, and the internal processes applied to assess the basis on which loan funds are being provided and the monitoring of such loans is consistent with a profit making intention.

Overall, the consolidated group has generated profits from the money lending activities undertaken.

Size and scale

In 20XX, the consolidated group had X loan assets which increased to XY loans in 20YY.

The scale of lending activities undertaken by the various members of the consolidated group is collectively considerable, both in terms of dollar amounts and also in terms of numbers of borrowers.

Other matters

You have acknowledged that you are not registered as a moneylender. However, non-registration as a moneylender is only one circumstance to be considered and is not decisive in determining whether you are not in the business of money lending.

Whilst the consolidated group intends to predominantly or solely make loans to entities linked to the Group, an entity that provides finance to related entities is not precluded from being characterised as a moneylender where the activities undertaken are done so in a commercial and businesslike manner, and where the entity has an underpinning profit making intention (Bivona).

In considering the activities of the consolidated group it is obvious you are not conducting an activity that is better described as a hobby, a form of recreation or sporting activity.

In examining the lending activities of the consolidated group, it can be seen that those activities are undertaken in a structured and systematic way that demonstrates commercial purpose. The consolidated group is conducting its activities in a businesslike manner with a degree of repetition and regularity. The scale of the lending is significant such that the consolidated group's money lending is not ancillary or incidental to another part of its business. It is apparent that the consolidated group is conducting its money lending activity with a view to profit.

Therefore, on the balance of facts presented, it is considered that you and your subsidiary entities within the consolidated group are carrying on a business of lending money for the purposes of paragraph 230-180(3)(b) of the ITAA 1997.

As such, any loss made in respect of bad debts written off in relation to any loan made by you or your subsidiary entities within the consolidated group in the ordinary course of your money lending business will constitute a loss from a financial arrangement pursuant to subsection 230-180(3) of the ITAA 1997.

Irrespective of which of the consolidated group entities writes a debt off as bad, as the head company of your consolidated group you will (by application of the single entity rule under section 701-1 of the ITAA 1997) be taken to have written off the bad debt, and realise a loss from a financial arrangement pursuant to subsection 230-180(3) of the ITAA 1997.

The bad debt loss will be taken to occur at the time all or part of the right to the financial benefit is written off as a bad debt (subsection 230-180(4) of the ITAA 1997), and the amount of the bad debt loss will be equal to the amount of the financial benefit which was written off as bad (paragraph 230-180(5)(b) of the ITAA 1997).

Losses made from a financial arrangement are deductible under subsection 230-15(2) of the ITAA 1997 to the extent that they're made in gaining or producing assessable income.

Subject to none of the general restrictions on the availability of deductions for bad debts (as listed in subsection 25-35(5) of the ITAA 1997) applying, as assumed for the purposes of this ruling, any bad debt losses you make in accordance with subsection 230-180(3) of the ITAA 1997 will be deductible under subsection 230-15(2) of the ITAA 1997.

Questions 2 and 3

Summary

As any debt written off as bad by you in relation to loans you make in the ordinary course of your money lending business will be deductible under subsection 230-15(2) of the ITAA 1997, the deductibility of such amounts under sections 8-1 and 25-35 of the ITAA 1997 is not required to be considered.

Detailed reasoning

A loss that is allowable as a deduction to an entity for an income year under Division 230 of the ITAA 1997 is not to be (to any extent) allowable as a deduction to that entity under any provisions of the ITAA outside Division 230 for the same or any other income year (subsection 230-20(4) of the ITAA 1997).

It follows that a bad debt loss which is allowable as a deduction to you under subsection 230-15(2) of the ITAA 1997, as confirmed at question 1 of this ruling, is not to be (to any extent) allowable as a deduction to you under any provisions of the ITAA outside Division 230 for the same or any other income year.

Having already confirmed the deductibility of a bad debt written off by you under subsection 230-15(2) of the ITAA 1997, there is therefore no need to consider the deductibility of such amounts under any other provisions of the ITAA, including sections 8-1 and 25-35 of the ITAA 1997.