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Authorisation Number: 1051293395133

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Date of advice: 16 October 2017

Ruling

Subject: Small business entity - carrying on a business - money lending

Question:

Are you carrying on a business of money lending for the purpose of section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following periods

Income year ended 30 June 2014

Income year ended 30 June 2015

Income year ended 30 June 2016

Income year ended 30 June 2017

Income year ending 30 June 2018

The scheme commences on

1 July 2013.

Relevant facts and circumstances

Background

You were incorporated after 20 September 1985 and commenced your money lending activities after a number of years. You currently have no other business operations.

Your current lending activities are with external parties at commercial rates to assist the funding of commercial property development.

You are not a registered money lender.

You engaged the services of lawyers to prepare the loan documentation.

Your director attends business meetings on a weekly basis with the Directors/Trustees of the borrowers in relation to the loans to discuss the business developments, ensure monthly interest payments have been made and to review business capability of repaying loans.

Lending activities

Loan A

You entered into the Loan A agreement between you and the Trustee of Trust 123 (the lenders) and Company A as the trustee of Trust A (the borrower). Under the Loan Agreement you and the Trustee of Trust 123 loaned different amounts to the Trustee of Trust 123, with you issuing a loan of $X,XXX,XXX.

Under the Loan A agreement you were to receive interest payments of $XX,XXX over a specified period.

Trust A carries on a business of land development and/or subdivision and had obtained the loan to use the borrowed funds to fund the Trust’s activities in relation to a specified development activity.

Variation of Loan A

After a number of years, Loan A was varied and you and the Trustee of Trust 123 each issued additional amounts of $XXX,XXX to Company A as the trustee of Trust A. In accordance with the varied loan agreement, you and the Trustee of Trust 123 each received interest for the additional loan amounts, and reduced interest in relation to the original loan amounts. Under the varied loan agreement you received interest payments of $XX,XXX per month.

Loan B

In the same month that the variation of Loan A occurred, you entered into a loan agreement with Person A as the trustee for Trust XYZ. The loan amount was $X,XXX,XXX which the Trustee obtained to assist with the funding of construction in relation to a specified activity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Small business entity

From 1 July 2016, you are a small business entity under section 328-110 of the ITAA 1997 if you:

● operate a business for all or part of the income year; and

● satisfy the $10 million aggregated turnover test.

Your aggregated turnover can be determined using one of the three following methods:

1. you carried on a business in the previous income year and its aggregated turnover for the previous income year was less than $10 million; or

2. your aggregated turnover for the current year is likely to be less than $10 million; or

3. your actual turnover at the end of the current year is less than $10 million.

To qualify as a small business entity, the entity must firstly carry on a 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 Commissioners view of the factors used to determine if you are in business for tax purposes which include:

● 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 (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 money lender 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 business-like manner with a view to yielding a profit from that activity.

Non-registration as a money lender is only one circumstance to be considered and is not decisive. In Administrators of Estate of Stewart v C of T (NSW) (1935) 3 ATD 271 it was held that, despite non-registration as a money lender, the taxpayer was carrying on a money lending business.

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.

For the purposes of taxation law, a money lender does not have to necessarily be ready and willing to lend money to the public at large, or to a wide class of borrowers. Registration as a money lender and the number of borrowers does not conclusively determine that a business of money lending is being carried on. In addition, it is sufficient if the taxpayer lends money to certain classes of borrowers, provided the taxpayer does so in a businesslike manner with a view to yielding a profit from that activity.

Application of the law to your circumstances

You were incorporated after 20 September 1985 and commenced your money lending activities after a number of years. You currently do not carry on any other business operations.

You made loans to external parties including an initial loan of $X million in relation to the Loan A, from which you were to receive interest on a monthly basis for a specified period. This loan agreement was varied when you loaned an additional amount of $XXX,XXX and your interest payments were varied to $XX,XXX for your share of the original loan and the additional loaned amount.

You also issued a loan of $X,XXX,XXX around the time Loan A was varied and receive monthly interest payments of $XX,XXX.

Your activities show elements of repetition and regularity in running a money lending business. You have made a number of loans which demonstrates that no loan was a single and isolated transaction.

The amount of money loaned to external parties is significant as such that the income derived from loans is not ancillary or incidental to another part of your business. It also demonstrates your intention to carry on a money lending business.

You state that your aggregated turnover was less than $10 million in the 2016-17 income year and is estimated to be less than $10 million in the current income year, being the 2017-18 income year.

It is stated that the loans provided a higher than average interest rates due to the perceived risk involved with lending money to property developers. It is accepted that projects with higher perceived risks are charged higher interest to reflect the relative risk of each project. This approach in setting interest rates on loans demonstrates your profit making intention that you are carrying on a business of money lending.

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

In examining your lending activities, it can be seen that you are conducting those activities in a structured and systematic way that demonstrates commercial purpose. It is apparent that you are conducting your money lending activity with a view to profit. You are not conducting an activity that is better described as a hobby, a form of recreation or sporting activity.

Therefore, on the balance of facts presented, it is considered that you are carrying on a business of lending money for the purposes of section 328-110 of the ITAA 1997.

Further issues for you to consider

Eligibility to the reduced tax rate of 27.5%

In your private ruling application you were seeking confirmation that you meet the conditions contained in section 328-110 of the ITAA 1997 so that you would be eligible to obtain the reduced tax rate of 27.5%.

It was stated in the ruling that you met the aggregated turnover test in the 2016-17 income year, and expected to meet it in the 2017-18 income year. However, the Commissioner has not considered whether you meet the aggregated turnover test contained in section 328-110 of the ITAA 1997 in this ruling decision.

In relation to your eligibility to the reduced tax rate, we offer the following information to assist you with this issue:

Companies can qualify for the reduced small business tax rate of 27.5% if they are carrying on a business and meet the aggregated turnover test. However, Treasury has released an Exposure Draft (ED) intended to clarify that companies who have predominantly passive income cannot access the lower company tax rate before the 2023-24 income year. If enacted, this Bill will amend the law for companies.

The new rules will impose an additional condition to the aggregated turnover test and the carrying on a business test. The additional condition that companies will need meet to qualify for the lower tax rate is that 80% or more of the company’s income cannot be passive income which is defined as including portfolio dividends, interest, royalties, rent, capital gains and trust and partnership distributions received from such income.

More information about the Bill can be sourced via https://treasury.gov.au/consultation/c2017-t220217/