Private ruling: Carrying on a business of lending money
Date of advice: 21 April 2020
Published: June 2020
Ruling period: 1 January 20XX to December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Was SubCo in the business of lending money within the meaning of paragraph 25-35(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) when it made Loan 1 and Loan 3, prior to joining the Australian income tax consolidated group? | A1: Yes | Q2: Was HeadCo in the business of lending money within the meaning of paragraph 230-180(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) when SubCo made Loan 4? | A2: Yes

Relevant facts and circumstances: Group structure and background 1. SubCo is an Australian proprietary company and a wholly-owned subsidiary of HeadCo. 2. Several years after its incorporation, SubCo became a member of an Australian income tax consolidated group (the TCG group), of which HeadCo was the head company. 3. HeadCo is a wholly-owned subsidiary of a foreign group. 4. More recently, an Australian multiple entry consolidated (MEC) group (the MEC group) was formed. HeadCo is the provisional head company of the MEC group and SubCo is currently a subsidiary member of the MEC group. 5. The Australian group undertakes projects in a particular sector. These projects are often structured as partnerships or joint ventures with the Australian group's subsidiaries acting as a joint venture participant. The debt required to fund these projects is provided directly or indirectly by either third party debt providers or by SubCo. SubCo overview 6. SubCo was established as a lending entity for the Australian group as well as unrelated parties on associated projects to facilitate debt funding and create operational efficiencies. 7. Funding was centralised in SubCo to: a. Ensure that all entities obtaining financing were dealing with the same entity. This created consistency between the loan terms issued to each entity, consistency among communication sent to borrowers and simplified the manner in which loans were recorded and subsequently accounted for; b. Clearly identify the separate and distinct financing activities in SubCo from the operating activities within the rest of the Australian group, to create transparency for reporting purposes; c. Create transparencies between SubCo and the borrowers in terms of information provided to assist with obtaining finance. This information includes, but is not limited to, cash flow forecasts and financial ratios. 8. SubCo does not have a lending licence or an Australian Financial Services Licence. SubCo is a Registered Financial Corporation (RFC) within the meaning of section 7 of the Financial Sector (Collection of Data) Act 2001 (Cth). 9. SubCo does not advertise its money lending services to the general public. SubCo's lending to unrelated parties is sourced through existing networks and relationships. SubCo does not provide financing to unrelated parties that it does not have an existing relationship with. 10. SubCo does not have any direct employees. SubCo sources staff employed by HeadCo. 11. Additionally, the foreign parent of the Australian group provides support to SubCo. When SubCo commenced lending activities, the foreign parent seconded two of its employees to Australia to manage and supervise the lending business. At the time, the foreign parent had substantial experience in the finance business having also provided lending services to its clients and business partners overseas. The foreign parent is also involved in the initial assessment of loan applications. Lending activities 12. SubCo commenced lending to unrelated parties, when it was approached to act as the financier of a development project (the Project). The Project was jointly developed and constructed by HeadCo and its business partner. 13. SubCo was aware of the details of the development and expected financing required and was comfortable to act as the financier on the basis that security was held over the properties. 14. Upon completion of the Project, the related business (the Business) opened and continued to be operated by the Australian group and its business partner for over 20 years until it was sold to an unrelated party. At the time when the Business was sold, SubCo was a member of the MEC group. 15. Since the sale of the Business, SubCo has continued to operate as the finance company for the Australian group. No new loans have however, been entered into with any unrelated parties since the sale of the Business. 16. Since SubCo commenced lending, it has made a total of nine loans to four unrelated parties. All four borrowers are associated with HeadCo's business partner on the Project. 17. SubCo initially made a number of loans for the development and construction of the Project. Several additional loans, including Loan 4, were advanced in later years in an effort to improve the operations and profitability of the Business. This was done with the view that increasing profitability would maximise the recovery of the initial construction loans and position the Business for the best sales price, thereby also maximising the recovery of the initial loans. 18. With the exception of Loan 4, all loans to the unrelated borrowers were made by SubCo prior to it joining the TCG. Loan 4 was made by SubCo shortly after joining the TCG. At the time of making Loan 4, Loan 1 and Loan 3 were further extended under the same facility agreement as Loan 4. 19. The total amount of funds SubCo has loaned to unrelated parties over the course of its business is significant. The interest rates charged on these unrelated party loans were within a similar range, except for Loan 4 which was charged at a significantly higher interest rate compared to the other loans. The interest rates charged on these third party loans are all higher than the interest rates at which the funds were obtained by SubCo. 20. SubCo currently lends to two related parties who are both members of the MEC group. 21. SubCo does not undertake any other banking or treasury functions on behalf of the MEC group. SubCo has not undertaken any activities other than the facilitation of finance since its incorporation. As such, SubCo's only source of income is interest income. 22. SubCo's lending activities have historically been profitable, both during the period prior to and after joining the TCG. Loan applications process 23. In order for an entity, whether within the Australian group or an external party on an associated project, to apply for financing from SubCo, the following application process is undertaken: (i) The potential borrower approaches SubCo with a request for finance. The request will generally feature the following details: · Why the finance is being obtained · The preferred loan amount · The preferred loan term · Cash flow forecasts · Revenue forecasts · Any other information that may be relevant (ii) The application is reviewed by SubCo to ensure sufficient information has been provided. Additional information is sought where required. (iii) The application is assessed by SubCo and the foreign parent's finance team against a number of criteria, including but not limited to: · Value of all loans the potential borrower currently has outstanding with SubCo (if any) · History of compliance with previous finance arrangements (for example were all payments made on time, was the loan paid out early, or did the loan default) · Reasonableness of capacity to pay loans provided. 24. The members of the foreign parent's finance team who assess the application have extensive experience working in the finance businesses. 25. Once SubCo and the foreign parent have assessed the loan application, the loan terms are drafted. The draft finance terms are submitted to the board of directors of SubCo and the foreign parent for their review and final approval. Each of the directors have experience with finance arrangements. 26. Whilst the terms are generally equivalent or better than finance arrangements that the borrower could receive from external parties, the directors do not approve arrangements that are not in-line with the commercial objectives of SubCo, or are not in the interest of SubCo. 27. The arrangements are discussed in a board meeting, and all directors are in attendance. Minutes are recorded for each finance arrangement that is being reviewed, and director resolutions are signed to confirm if the arrangement has been approved. 28. Once the loans have been approved, each arrangement is continuously reviewed by SubCo to ensure that the borrower is complying with the loan terms. This includes members of SubCo and HeadCo attending various meetings of the Business's operations team, such as monthly executive meetings. At these meeting, monthly forecasts are discussed in person, including the borrower's ability to repay the loan. 29. The arrangements are secured over real property and the business conducted by the borrowers. 30. Where it is identified that the loan terms are being breached, SubCo will seek to begin recovery action. 31. Where the arrangement terms require amendment, the board will approve this via the same process detailed above. Process specific to unrelated parties 32. Each lending arrangement that SubCo enters into with unrelated parties is made subject to the "credit-worthiness" of the borrower and financing is not provided where the lending arrangement is not in the interests of SubCo and its commercial objectives. The existing relationships that SubCo has with all its unrelated third party borrowers allow SubCo direct access to information required to approve and monitor its lending arrangements. 33. SubCo determines the lending terms based on the borrower's request for acquisition and development costs, CAPEX and working capital. Due to the transparent relationship that SubCo has with its borrowers, the borrowers often share their cashflow and project forecasting in monthly meetings and upon requests. This allows SubCo to make educated decisions around the level of financing required and the associated lending terms. Sources of loan funding for SubCo 34. SubCo sources funds from overseas to on-lend to related and unrelated parties via HeadCo and its foreign parent. The funds are on-lent to unrelated parties at a margin. 35. SubCo has also previously obtained funding from an external lender.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-35 | Income Tax Assessment Act 1997 Paragraph 25-35(1)(b) | Income Tax Assessment Act 1997 Section 230-15 | Income Tax Assessment Act 1997 Section 230-180 | Income Tax Assessment Act 1997 Subsection 230-180(3) | Income Tax Assessment Act 1997 Paragraph 230-180(3)(b) | Income Tax Assessment Act 1997 Section 701-1 | Income Tax Assessment Act 1997 Section 701-5 | Income Tax Assessment Act 1997 Subsection 719-2(1) | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: SubCo was in the business of lending money within the meaning of paragraph 25-35(1)(b) the ITAA 1997 at the time when it made Loan 1 and Loan 3. | Detailed Reasoning - Detailed reasoning: Section 25-35 of the ITAA 1997 allows a deduction for a debt (or part of a debt) that has become bad and which is subsequently written off where particular circumstances are met. Subsection 25-35(1) states: | Detailed Reasoning - 25-35 Bad debts: (1) You can deduct a debt (or part of a debt) that you write off as bad in the income year if: (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 Income Tax Assessment Act 1936 ): see subsection 63(1A) of that Act. One of the criteria is that the debt written off as bad is in respect of money that the entity lent in the ordinary course of the entity's business of lending money (paragraph 25-35(1)(b) of the ITAA 1997). | Detailed Reasoning - Carrying on a business as a moneylender: Generally, the factors considered in determining whether someone is carrying on a business of lending money are similar to those considered in determining the carrying on of any business. Subsection 995-1(1) of the ITAA defines 'business' as including 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'. Whilst this definition sets out what activities may be included in a business, it does not provide any guidance for determining whether the nature, extent and manner of undertaking those activities amount to the carrying on of a business. The question of whether a business is being carried on is a question of fact and degree. The courts have identified a number of indicators that are relevant to determining whether activities constitute the carrying on of a business. These indicators are set out at paragraph 13 of Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11), which states the Commissioner's view on the meaning of 'carrying on a business'. These indicators 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 repetition and regularity of the activity; · Whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business; · Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity. Paragraph 15 of TR 97/11 emphasises that no one indicator is decisive and there is often significant overlap of these indicators: Evans v Federal Commissioner of Taxation [1989] FCA 278. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained': Martin v Federal Commissioner of Taxation [1953] HCA 100. Taxation Ruling 92/18 Income tax: bad debts (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 former section 63 of Income Tax Assessment Act 1936 (ITAA 1936), the same principles apply in respect of section 25-35 of the ITAA 1997. Paragraph 43 of TR 92/18 reiterates that the question of whether a taxpayer is carrying on a money lending business is necessarily a question of fact and proceeds on to consider a number of cases. One of these cases is Federal Commissioner of Taxation v Marshall and Brougham Pty Ltd 87 ATC 4522 ( Marshall and Brougham ) where Bowen CJ at 4528-4529 made the following observations on determining whether a taxpayer is a money lender: 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. Another case is Litchfield v. Dreyfus [1906] 1 KB 584 at 589 where Farwell J stated: 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. Paragraph 44 of TR 92/18 however, states that the meaning of 'money lender' for taxation purposes should not be restricted in light of the more recent Australian cases of Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153, Federal Commissioner of Taxation v Marshall and Brougham Pty Ltd , and Federal Commissioner of Taxation v Bivona Pty Ltd . Paragraph 45 states these recent cases have highlighted differences between laws relating to the control of money lenders and the laws relating to the taxing of money lenders. In Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153 ( Fairway Estates ), 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, the taxpayer company was incorporated for the purpose of borrowing money overseas ($4 million 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. Paragraph 46 of TR 92/18 accordingly provides that a money lender need not necessarily be ready and willing to lend moneys to the public at large or to a wide class of borrowers. It would be 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 profit from it. Further, in the case of Richard Walter Pty Ltd v Federal Commissioner of Taxation 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 money lender is only one circumstance to be considered and is not decisive. In Administrators of Estate of Stewart v. Commissioner of Taxation (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 relation to the deductibility of bad debts, paragraph 49 of TR 92/18 outlines the Commissioner's view that the taxpayer's money lending business must have been carried on at the time the loan was made. This view is supported by Barwick CJ who stated in Fairway Estates at 4066 '... that the advance of money in question should have been made by the claimant taxpayer in the ordinary course of the business of lending money then carried on by him'. Bowen CJ also took a similar view in Marshall and Brougham at 4528 where he stated '... the taxpayer must be in the business of lending money at the time of making the advance in respect of which the deduction is claimed'. Paragraph 52 of TR 92/18 provides that on balance, whilst the taxpayer must be in the business of money lending at the time the loan was made, the Commissioner accepts that the taxpayer does not have to be carrying on a business of money lending at the time the debt is written off. 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. It may be sufficient if a taxpayer lends money to certain classes of borrowers, provided the taxpayer does so in a business-like manner with a view to yielding a profit from that activity. The money lending business must have been carried on at the time the loan was made. | Detailed Reasoning - Application to SubCo: It was determined post the sale of the Business that Loan 1 and Loan 3 were unlikely to be recovered and therefore to be written off by SubCo. In determining whether SubCo can be said to be carrying on a business of money lending within the meaning of subsection 25-35(1), regard must be given to the activities of SubCo at the time Loan 1 and Loan 3 were made. It is not necessary for SubCo to be carrying on a business of money lending at the time the deduction for bad debts is claimed. SubCo was specifically established to act as a financier for the Australian group as well as unrelated parties on associated projects. SubCo commenced lending to unrelated parties prior to joining the TCG with support from its foreign parent who had substantial experience in the finance business overseas. Since then, SubCo has made a total of 9 loans to 4 unrelated entities. Whilst these 4 entities are all associated with HeadCo's business partner on the Project, it is well established that a money lender need not necessarily be ready and willing to lend money to the public at large, or to a wide class of borrowers. SubCo lent money to these 4 unrelated entities over the course of 20 years, beginning with the development and construction of the Project and further loans thereafter to improve the operations of the Business. The activities undertaken by SubCo therefore show a sufficient degree of repetition and regularity. The number of loans issued over the years also demonstrates that no loan was a single and isolated transaction. SubCo has an established application process for the approval of loans to both related and unrelated borrowers. The loan applications are assessed and approved by the board of directors of both SubCo and its foreign parent. Once approved, the loans are actively monitored by SubCo to ensure the borrower's ability to repay the loan. All loans are secured over real property and the business conducted by the borrowers. These internal procedures adopted by SubCo in respect of choosing to make new loans, and monitoring the ability of borrowers to repay existing loans, as well as seeking security, suggest that SubCo has conducted its lending activities in a businesslike and systematic way that demonstrates a commercial purpose. From the time when SubCo commenced lending, to when it joined the TCG, SubCo lent a significant amount to unrelated parties. Whilst it is acknowledged that the terms of the loans made to unrelated parties may be better than finance arrangements that the borrower could receive from external parties, the interest rates charged on these loans are higher than the interest rates at which the funds were obtained by SubCo. SubCo's lending activities have historically been profitable during the period prior to joining the TCG. The scale of lending activities, the rates of interest charged and the profits earned supports the conclusion the lending activities were undertaken not just with an intention to engage in business but also with a view to profit. SubCo does not have a lending licence or an Australian Financial Services Licence. However, non-registration as a money lender is only one circumstance to be considered and is not decisive in determining whether a taxpayer is carrying on a business of money lending. SubCo is listed as a RFC. Although SubCo does not advertise its money lending services to the general public and only loans to unrelated parties that it has an existing relationship with, this is not a determinative factor on its own. | Detailed Reasoning - Conclusion: Upon considering all the factors listed in TR 97/11, it is considered that SubCo was carrying on a business of lending money, within the meaning of paragraph 25-35(1)(b) of the ITAA 1997, at the time when it made Loan 1 and Loan 3. | Detailed Reasoning - Consequence for the MEC group: Taxation Determination TD 2005/23 Income tax: consolidation: can the head company of a consolidated group satisfy subsection 25-35(1) of the Income Tax Assessment Act 1997 in relation to a debt that is written off as bad by a subsidiary member, where the debt is in respect of money lent by the subsidiary in the ordinary course of its business of lending money before it became a member of the consolidated group? (TD 2005/23) considers the deductibility by a head company of a bad debt written off by a subsidiary member, where the debt is in respect of money lent by the subsidiary in the ordinary course of its business of lending money before it became a member of the consolidated group. The single entity rule (SER) under section 701-1 of the ITAA 1997 treats a subsidiary member of a consolidated group as part of the head company (rather than a separate entity) for the subsidiary's and head company's income tax purposes during the period that the subsidiary is a member of the group. As a consequence, the assets a subsidiary member owns are taken to be owned by the head company and the actions and transactions of a subsidiary member are taken to be the actions and transactions of the head company (paragraph 3 of TD 2005/23). The exit history rule (EHR) under section 701-5 of the ITAA 1997 provides that, in relation to the period after the entity becomes a subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the head company (paragraph 4 of TD 2005/23). Paragraph 5 of TD 2005/23 provides that the combined effect of the SER and EHR is that the head company of the consolidated group is taken to have: · the debt in respect of the money lent by the subsidiary; · lent that money in the ordinary course of its business of lending money; and · written off the debt as a bad debt. Subsection 719-2(1) of the ITAA 1997 ensures that the consolidation provisions in Part 3-90 of the ITAA 1997 (with certain exceptions and modifications) have effect in relation to a MEC group in the same way as they have effect in relation to a consolidated group. In particular, the SER and EHR, contained in Division 701 of Part 3-90 of the ITAA 1997, have effect in relation to a MEC group in the same way in does in relation to a consolidated group By virtue of the operation of subsection 719-2(1) of the ITAA 1997 and the SER, Loan 1 and Loan 3 will be considered assets of HeadCo, the provisional head company of the MEC group from the date the MEC group was formed. As a result of the application of the EHR, HeadCo will be taken to be carrying on a business of lending money at the time when Loan 1 and Loan 3 were made by SubCo. | Detailed Reasoning - Question 2: Was HeadCo in the business of lending money within the meaning of paragraph 230-180(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) when SubCo made Loan 4? | Summary: HeadCo was in the business of lending money within the meaning of paragraph 230-180(3)(b) the ITAA 1997 at the time when SubCo made Loan 4. | Detailed Reasoning - Detailed reasoning: The MEC group is subject to the Taxation of Financial Arrangements (TOFA) regime under Division 230 of the ITAA 1997 on the basis that the aggregated turnover of the group is greater than $100 million. HeadCo applies the realisation method. TOFA applies to financial arrangements an entity starts to have in its first income year commencing on or after 1 July 2010. HeadCo has not made an election for the TOFA rules to apply any earlier. Loan 4 was entered into during the 20XX income year and will be subject to TOFA provided it is a financial arrangement. Subject to certain exceptions, section 230-15 of the ITAA 1997 includes in your assessable income a gain that you make from your financial arrangements and sets out the circumstances that allow you to deduct a loss from your financial arrangements. Section 230-180 of the ITAA 1997 sets out the application of the realisation method for taking into account your gain or loss for an income year for the purposes of section 230-15 of the ITAA 1997. Subsection 230-180(3) of the ITAA 1997 provides the circumstances in which you make a loss from a financial arrangement. In particular 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 lending money. 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 of lending money. | Detailed Reasoning - Application to HeadCo: Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 explains how the single entity rule (SER) in section 701-1 of the ITAA 1997 applies to members of a consolidated group. The SER treats a subsidiary member of a consolidated group as part of the head company (rather than a separate entity) for the subsidiary's and head company's income tax purposes during the period that the subsidiary is a member of the group. As a consequence, the assets a subsidiary member owns are taken to be owned by the head company and the actions and transactions of a subsidiary member are taken to be the actions and transactions of the head company (see paragraphs 7 and 8 of Taxation Ruling TR 2004/11). In determining whether the head company of a consolidated group is carrying on business as a money lender, Tax Determination TD 2004/37 Income tax: consolidation: are intra-group money lending transactions or dealings taken into account in determining if the head company of a consolidated group is carrying on business as a money lender? (TD 2004/37) confirms that only those money lending transactions or dealings that are with non-group entities are taken into account (paragraph 5 of TD 2004/37). Subsection 719-2(1) of the ITAA 1997 ensures that the consolidation provisions in Part 3-90 of the ITAA 1997 (with certain exceptions and modifications) have effect in relation to a MEC group in the same way as they have effect in relation to a consolidated group. Specifically, subsection 719-2(1) of the ITAA 1997 provides that: [this Part 3-90] (other than Division 703 and this Division) has effect in relation to a *MEC group in the same way in which it has effect in relation to a *consolidated group. In particular, the SER contained in Division 701 of Part 3-90 of the ITAA 1997, has effect in relation to a MEC group in the same way it does in relation to a consolidated group. Applying the SER, the provisional head company of a MEC group is treated as being in the business of money lending, where the MEC group has a member who carries on a business of money lending, and the money lending activities are with entities that are not members of the MEC group. It was determined following the sale of the Business that Loan 4 was unlikely to be recovered and therefore to be written off by SubCo, who was then a member of the MEC group. By virtue of the operation of subsection 719-2(1) of the ITAA 1997, and the SER, Loan 4 will be considered an asset of HeadCo, the provisional head company of the MEC group. Accordingly, for the purposes of determining whether HeadCo can satisfy paragraph 230-180(3)(b) of the ITAA 1997 in relation to a debt that is written off as bad by SubCo, it is necessary to ask the question whether SubCo was carrying on a business of lending money. In answering this question, only lending activities with unrelated third parties is to be considered. In determining whether SubCo can be said to be carrying on a business of lending money for the purposes of paragraph 230-180(3)(b) , regard must be given to the activities of SubCo at the time the specific loan (the subject of the debt that is intended to be written off as bad) was made, being shortly after joining the TCG for Loan 4. It is not necessary for SubCo to be carrying on a business of money lending at the time the deduction for bad debts is claimed. It has been determined that SubCo was carrying on a business of money lending up until when it made Loan 3. SubCo made Loan 4, just after it joined the TCG. Between the time when SubCo made Loan 3 and when it made Loan 4, a number of years passed where SubCo did not make any loans to unrelated parties. The question arises, therefore, whether SubCo was still carrying on a money lending business when it made Loan 4 and whether the money lending activities at that time had become ancillary or incidental to the activities of the TCG. Since making Loan 4, SubCo has not made any subsequent loans to unrelated parties. Whilst SubCo only made 1 loan subsequent to making Loan 3 (and no new loans since making Loan 4), it continued to service Loan 1 and Loan 3 during this period. SubCo further extended the terms of Loan 1 and Loan 3 under the same facility agreement as Loan 4. SubCo agreed to advance Loan 4 in an effort to improve the operations and profitability of the Business. The additional funds were provided for use to position the Business for the best sales price, thereby maximising the recovery of the original construction loans. This additional loan, Loan 4 was issued at a higher interest rate compared to the original loans. The making of Loan 4 and the refinancing of Loan 1 and Loan 3 suggest that SubCo continued to conduct its lending activities in a structured and systematic way that demonstrates a commercial purpose. Since it joined the TCG, SubCo has been servicing these 3 loans and has been profitable. The amount of profits earned around the time it joined the TCG and the higher interest rate charged on Loan 4 demonstrates that SubCo had a profit-making intention. Furthermore, the scale of loans on hand being serviced by SubCo around this time was significant such that SubCo's lending activities cannot be said to be merely ancillary or incidental to HeadCo's business. | Detailed Reasoning - Conclusion: Taking into account the factors listed in TR 97/11, it is considered that SubCo was carrying on a business of money lending within the meaning of paragraph 230-180(3)(b) of the ITAA 1997 at the time when it made Loan 4. As a result of the application of the SER contained in subsection 701-1(1) of the ITAA 1997, HeadCo is considered to have been in the business of lending money within the meaning of paragraph 230-180(3)(b) of the ITAA 1997 at the time when SubCo made Loan 4.

Loans subject of this ruling: 36. At the time of the sale of the Business, SubCo had three outstanding loans to unrelated parties, being Loan 1, Loan 3 and Loan 4 (the relevant loans). All other loans that SubCo had made to unrelated parties had been repaid at this time. | 37. Following the sale of the Business, the borrowers used the proceeds from the sale to repay some of the outstanding debt owed to SubCo. | 38. It was subsequently determined that the remaining debt outstanding on relevant loans were unlikely to be recovered when SubCo was notified by a liquidator that the borrowers had been placed into liquidation. The borrowers were deregistered later that year and SubCo did not receive any additional repayments from the borrowers in respect of the relevant loans. | 39. SubCo intends to write off as bad debts the balance remaining on the relevant loans on the basis that borrowers are unable to repay the loans. | 40. Loan 1 and Loan 3 were made prior to SubCo joining the TCG. Loan 4 was made subsequent to SubCo joining the TCG, but prior to it joining the MEC group. | 41. The MEC group is subject to the Taxation of Financial Arrangements (TOFA) regime under Division 230 of the Income Tax Assessment Act (ITAA 1997) on the basis that the aggregated turnover of the group is greater than $100 million. HeadCo applies the realisation method and no elections have been made.