Edited version of your written advice

Authorisation Number: 1051439787957

Date of advice: 15 October 2018

Ruling

Subject: Am I in business - money lending

Question

Are you carrying on a business of money lending for the financial year ended 20XX and subsequent financial years?

Answer

Yes

This ruling applies for the following periods:

For the financial year ended 30 June 20XX

For the financial year ended 30 June 20XX

For the financial year ended 30 June 20XX

For the financial year ended 30 June 20XX

For the financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A provides capital for both private third party mortgages and business loans. Company A’s directors have extensive experience in financial management and structuring regarding property and business finance.

Director 1 has a Australian Financial Services Licensed entity that acts as a Responsible Manager for funds that provide mortgages and raises capital to fund the mortgages. Director 1 has a degree and several years’ experience in the industry. Director 1 works in the business fulltime.

Director 2 holds degrees in marketing and business administration.

Company A lends to businesses only for investment, cash flow funding, property development and business restructuring purposes.

Company A in making loans, does so as a business activity to generate income. Loans are made via loan agreements. Company A is entitled to receive interest on the loans.

Formal loan agreements are signed by the lender and borrower. Loan agreements are made on commercial terms with both related and unrelated entities.

Company A keeps a record of each transaction in a loan register. The register contains details of the relationship, if any, borrowers have to Company A. As 100% of the business activity is lending, there is a single account for the entity.

Company A has not restricted lending activities to related entities. It has advanced funds to third parties.

Company A does not formally advertise or promote itself as a lender; 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.

Initially loans were funded to companies in Company A’s network including related parties.

Company A saw several benefits using intermediary originators and managers.

Company A has a core strategy of providing loan funds through intermediary professional companies.

Company A began working with the directors of Company B and Company C in order for them to develop a suitable lending strategy which involved deploying Company A’s loan funds alongside other unrelated lenders to increase origination of quality lending opportunities.

The lending activity Company A engages in is unregulated private lendings. To mitigate risks Company A has selected partner companies who are regulated by ASIC holding Australian Financial Services Licences to run unregistered contributory schemes.

Company A has purchased a stake in Company C, who is in the business of providing mortgages.

Company A returns the interest on the loans as income and keeps separate records for each loan. Company A generated income from interest derived from money lending activities in the financial year’s ended 30 June 20XX and 30 June 20XX.

Company A also derived interest income from related party Division 7A loans in the financial year’s ended 30 June 20XX and 30 June 20XX.

Once the initial loan Company A made was repaid, it has funded other loans.

In the year ending 30 June 20XX, Company A commenced lending funds to both unrelated and related entities.

The balance of the loans outstanding at the end of the year ended 30 June 20XX increased.

In the year ended 30 June 20XX, Company A had advanced funds to another company that was unable to repay the loan in full, and proceeded to take normal commercial debt recovery procedures.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Division 230

Reasons for decision

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 planned, organised and carried on in a businesslike manner such that it is described as making a profit

● 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.

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. This activity shows elements of repetition and regularity in running a money lending business. The number of loans issued over the period of operation demonstrates that no loan was a single and isolated transaction.

The scale of your lending is significant with loans being made to related and unrelated entities. As to the commerciality of the loans it is noted that in a previous year you had loans with several entities with a total value of loans outstanding of a significant amount. You have derived interest income from these loans. The scale of lending is significant as such that the income derived from loans is not ancillary to another part of your business. It clearly demonstrates your intention to carry on a money lending business.

The establishment of the relevant facilities to fund loans under commercial terms, and the process undertaken to recover loans is representative of a business of money lending.

The commercial approach to setting interest rates on these loans demonstrates your profit making intention in relation to your lending activities. 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 company. Further, it is apparent that you are conducting your money lending activity with a view to profit.

Therefore, it is considered that you are carrying on a business of lending money.