Edited version of your written advice

Authorisation Number: 1051346325401

Date of advice: 12 March 2018

Ruling

Subject: Am I in business - money lending

Question 1

Are you carrying on a business of money lending during the 20XX-XX income year?

Answer

Yes.

Question 2

Are you entitled to a bad debt deduction under section 8-1 or section 25-35 of the Income Tax Assessment Act 1997 (ITAA 97)?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

Individual A has qualifications and business experience and expertise in accounting. Individual A has run and owned a number of successful businesses in their own right over the past 35 years including an accounting practice, an import, distribution and manufacturing business in the electronics industry, a timber mill, a boning room and a development business, and currently has a little bookkeeping business.

Before the commencement of the money lending activity Individual A conducted extensive and varied research into short term money lending activity. Once Individual A realised that there was a definite market for non-bank short term lending he started talking with finance brokers and anybody who could shed some light as to how it works.

Individual A has been lending money for many years and intends to continue the money lending activity into the future.

Individual A operates the money lending activity and rental property portfolio through Company A as trustee for a Trust (the Trust). Therefore both rental and money lending activities are recorded in the financial statements of Company A.

The Trust has a detailed business plan which sets out the target clientele, any competition in the market, the aim of the business, strategy and pricing. It also describes how the borrowers are assessed, how the loan is established and how each loan will be managed.

The Trust has a detailed loan agreement contract for it and its borrowers.

The Trust only lends to small and medium size entities directly through introduction from finance brokers.

The duration of loans vary from two months to 12 months with the most favourable loan position being a period being six months.

The amount of funding provided for the clients is up to $XXX,XXX.

The Trust continually reviews its position and forecasting as it plans to reinvest the profits generated so in the future it will have sufficient financial resources to stand alone instead of operating through intermediaries.

The Trust currently has $X,XXX,XXX available. These funds are available through savings and borrowed funds.

As at the end of the calendar year the Trust has a number of loans currently being serviced with an outstanding loan balance of $XXX,XXX.

Interest revenue received from the loans up until the end of the calendar year amounted to $XX,XXX with interest expenses for the same period amounting to $XX,XXX. This gives you net interest revenue of $XX,XXX for the first six months income year.

The Trust has a potential for bad debts of $XXX,XXX.

The Trust aims to sell the rental properties in the Trust to have more funds available for the money lending activities.

The Trust does not do formal advertising; it develops personal relationships with brokers to ensure a steady stream of opportunities and relies on word of mouth amongst the brokers to increase its reputation.

The Trust uses accounting software for record keeping and keeps soft copy and hard copy files on each loan.

You spend between 12 to 20 hours per week depending on what opportunities are available, completing the following tasks:

● evaluating deals;

● communicating with brokers, borrowers and lawyers;

● following up interest payments and loan repayments; and

● attending to general administration to the activity.

● You are not required to be registered as a money lender for this type of lending.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-10

Income Tax Assessment Act 1997 section 25-35

Income Tax Assessment Act 1997 Section 995-1 of the ITAA 1997

Income Tax Assessment Act 1997 Division 12 of the ITAA 1997

Income Tax Assessment Act 1997 Division 230 of the ITAA 1997

Reasons for decision

Summary

The Trust considered to be carrying on a money lending business in the 20XX-18 income year as a result it is entitled to a bad debt deduction under section 8-1 or section 25-35 of the ITAA 97.

Detailed reasoning

Section 8-1 of the ITAA 1997 deals with general deductions and provides the circumstances where you may deduct from your assessable income, certain losses or outgoings. This section states that you may deduct losses or outgoings to the extent that:

(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.

However, certain exclusions exist to prevent you from deducting a loss or outgoing under this section to the extent that:

(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.

Section 8-10 of the ITAA 1997 indicates that if more than one provision applies, the most appropriate provision should be used. If there is a more specific section, it would be the section most appropriate.

Division 12 of the ITAA 1997 sets out particular types of deductions that are dealt with by a specific provision of either the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997. In particular, Division 12 lists that the rules in relation to deduction of general bad debts are provided for by section 25-35 of the ITAA 1997.

Subsection 25-35(1) of the ITAA 1997 provides the circumstances that must exist so that you can deduct a bad debt that you have written off in an income year. These circumstances are:

(a) it was included in your assessable income for the income year or for an earlier income year; or

(b) it is in respect of money that you lent in the ordinary course of your *business of lending money.

Note: If a bad debt is in respect of a payment that is required to be made under a qualifying security (within the meaning of Division 16E of Part III of the ITAA 1936): see subsection 63(1A) of that Act.

In order to claim a bad debt under paragraph 25-35(1)(b) of the ITAA 1997 it is necessary to demonstrate that the entity is carrying on a business as a moneylender and that the bad debt claimed 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 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view of the factors used to determine if you are in business for tax purposes.

In the Commissioner's view, 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 Income tax: bad debts (TR 92/18) provide 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 business-like 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 ones 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 Litchfield v. Dreyfus [1906] 1 KB 584 at p. 589, Farwell J stated 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

However, this should not restrict the meaning of 'moneylender' for taxation purposes in light of the more recent Australian cases of Fairway Estates Pty Ltd v. Federal Commissioner of Taxation (1970) 123 CLR 153; (1970) 70 ATC 4061; (1970) 1 ATR 726, Marshall and Brougham's case and FC of T v. Bivona Pty Ltd 90 ATC 4168; 21 ATR 151.

These recent cases have highlighted the differences between laws relating to the control of moneylenders and the laws relating to the taxing of moneylenders.

Further, in the case of Richard Walter Pty Ltd v FC of T 95 ATC 4440 Tamberlin J stated 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.

Non-registration as a moneylender 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.

In Federal Commissioner of Taxation v. Bivona Pty Ltd (1990) 21 FCR 562; 90 ATC 4168; (1990) 21 ATR 151, 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).

Accordingly, 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.

From 1 July 2010 Division 230 of the ITAA 1997 came into effect. It concerns the treatment of any gains or losses that arise from your financial arrangements.

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.

Application to your circumstances

In examining your lending activity it can be seen that you are conducting that activity in a structured and systematic way that demonstrates a commercial purpose. You are conducting your activity in a business-like manner with a degree of repetition and regularity. In addition, the scale of your lending is significant such that your money lending activity is not ancillary or incidental to another action of the trust. Further, it is apparent that you are conducting your money lending activity with a view to profit.

Therefore, it is considered that the Trust is carrying on a business of lending money and as a result it is entitled to a bad debt deduction under section 8-1 or section 25-35 of the ITAA 97.