ATO Interpretative Decision
ATO ID 2010/16
Income Tax
Eligible investment business: loan - Division 6C of the Income Tax Assessment Act 1936FOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Whether a participating loan provided by a managed investment scheme (MIS) is a 'loan' for the purposes of the definition of 'eligible investment business' in subparagraph 102M(b)(i) of Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936).
Decision
No, the participating loan is not a 'loan' for the purposes of the definition of 'eligible investment business' in subparagraph 102M(b)(i) of the ITAA 1936.
Facts
Investors will subscribe for units in a unit trust which is also a MIS for the purposes of section 9 of the Corporations Act 2001. The MIS will use the subscription monies, together with external borrowings, to provide what is called a participating loan to an unrelated entity (entity X).
Entity X will use the funding provided by the MIS under the participating loan to acquire a number of new residential properties which will be rented to tenants at arm's length. The funding provided by the MIS under the participating loan will represent a percentage of the cost to be incurred by entity X in acquiring all residential properties.
The participating loan provided by the MIS to entity X will have the following features:
- •
- it will not bear any interest
- •
- no periodic repayments will be required to be made by entity X
- •
- it will have a term of ten years
- •
- at the end of this term, entity X will be required to pay the MIS the amount due and payable under the participating loan agreement. The amount due and payable will be equal to 80% of the 'adjusted net sales value' of all the residential properties. This amount will be secured by mortgages held by the MIS over the residential properties, and
- •
- the amount payable by entity X under the participating loan agreement will be secured by mortgages held by the MIS over the residential properties
The concept of 'adjusted net sales value' is a defined term under the participating loan agreement and represents an agreed valuation of all the residential properties at the end of this term. Under the participating loan agreement, the 'adjusted net sales value' will be determined on the basis that all properties are fully and properly maintained during the ten year term.
Reasons for Decision
Subparagraph 102M(b)(i) of the ITAA 1936 provides:
In this Division, unless the contrary intention appears:
'
eligible investment
business' means one or more of:
The word 'loan' is not a defined term in Division 6C of the ITAA 1936. Accordingly, the question of whether the participating loan is properly characterised as a loan will need to be determined by reference to its ordinary meaning.
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW defines 'loan' as follows:
...something lent or furnished on condition of being returned, especially a sum of money lent at interest
Butterworths Concise Australian Legal Dictionary, 2004, 3rd edn, LexisNexis, NSW defines a 'loan' as:
An advance of money; the provision of credit; the payment of an amount on behalf or at the request of a person where there is an obligation to repay the amount; or a transaction which in substance affects a loan of money.
Judicial decisions suggest a similar interpretation. The decision in Inland Revenue Commissioners v. Rowntree and Co. Ltd [1948] 1 All ER 482 provides that for a facility to be characterised as a loan there must exist the legal relation of lender and borrower which gives rise to a loan of money in return for which there is a promise to repay.
In Re Securitibank Ltd (No.2) [1978] 2 NZLR 136, Richardson J stated at 167 that:
... the essence of a loan of money is payment of a sum on condition that at some future time an equivalent amount will be repaid.
Sackville and Lehane JJ in Federal Commissioner of Taxation v. Radilo Enterprises Pty Ltd (1997) 72 FCR 300; (1997) 34 ATR 635; (1997) 97 ATC 4151 noted that:
a loan involves an obligation on the borrower to repay the sum borrowed.
The Commissioner is of the opinion that the above definitions and case law provides the following understanding of the ordinary meaning of the word 'loan' for the purposes of subparagraph 102M(b)(i) of the ITAA 1936 and is succinctly expressed by the definition of 'loan' found in Joseph, C 1989, Chitty on Contracts, 26th edn, Sweet & Maxwell, London (at page 3574):
A contract of loan of money is a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest.
Under the arrangement, the MIS will provide entity X with the participating loan to assist with entity X's acquisition of residential properties, whereby entity X will be required to pay the MIS the amount due and payable under the participating loan agreement at the end of a ten year term. The amount due and payable will be equal to 80% of the 'adjusted net sales value' of all the residential properties.
The concept of 'adjusted net sales value' is a defined term under the participating loan agreement and represents an agreed valuation of all the residential properties at the end of this term. Under the participating loan agreement, the 'adjusted net sales value' will be determined on the basis that all properties are fully and properly maintained during the ten year term.
Due to the possible favourable or unfavourable movements in the 'adjusted net sales value' of a property over the term of a loan, the amount ultimately paid by entity X to the MIS under the participating loan agreement may be greater than or less than the amount initially provided by the MIS to entity X.
More importantly, the amount ultimately paid by entity X to the MIS under the participating loan agreement is not calculated by any reference to the amount of what is initially provided by the MIS to entity X.
Therefore, under the terms of the participating loan agreement there is no repayment to the MIS by entity X of a sum borrowed. Accordingly, in these circumstances there is no loan within the meaning of subparagraph 102M(b)(i) of the ITAA 1936 of the definition of 'eligible investment business' within section 102M of the ITAA 1936.
Date of decision: 23 December 2009Year of income: 30 June 2009 30 June 2010 30 June 2011 30 June 2012
Legislative References:
Income Tax Assessment Act 1936
subparagraph 102M(b)(i)
section 9
Case References:
Inland Revenue Commissioners v Rowntree and Co Ltd
[1948] 1 All ER 482
[1978] 2 NZLR 136 FC of T v Radilo Enterprises
(1997) 72 FCR 300
(1997) 34 ATR 635
(1997) 97 ATC 4151 Related ATO Interpretative Decisions
ATO ID 2010/17
Other References:
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW.
Butterworths Concise Australian Legal Dictionary, 2004, 3rd edn, LexisNexis, NSW.
Joseph, C 1989, Chitty on Contracts, 26th edn, Sweet & Maxwell, London.
Keywords
Public trading trusts
Eligible investment business
Borrowings & loans
Financial instruments
Securities
ISSN: 1445 - 2782