Taxation Ruling IT 2538 - Income tax: factoring of debts

What this ruling is about: This Ruling outlines the circumstances in which factoring of debts is effective for income tax purposes and, in particular, consolidates the guidelines set out in Taxation Ruling IT 2432, Canberra Income Tax Circular Memorandum No. 827 (CITCM 827), and paragraphs 2.4.17 to 2.4.20 of the A.T.O. Assessing Handbook (Volume 2 Business). 2. CITCM 827 outlines the basic form of a debt factoring arrangement: 3. The CITCM went on to outline one arrangement. 4. The Assessing Handbook states: 5. IT 2432 dealt with a case where it was considered that the factoring fees ought not to be allowed as income tax deductions under subsection 51(1). The parties involved - the taxpayer and the trustee of the taxpayer's family trust - were not considered to be operating at arm's length. The Ruling illustrated the sorts of considerations which must be taken into account in determining whether income tax deductions ought to be allowed for debt factoring fees arising out of non-arm's length arrangements and the need for the arrangements to be explicable by reference to ordinary business or commercial standards.


Ruling: 6. Debt factoring arrangements may be accepted where the arrangement is explicable by reference to ordinary business or commercial standards. Parties not at arm's length are not disqualified from entering into such arrangements. 7. Guidance as to the commercial factoring of debts is contained in paragraph 2.4.18 of the Assessing Handbook quoted above in paragraph 4. 8. IT 2432 is consistent with these guidelines. The thrust of the Ruling was to emphasise that in non-arm's length factoring arrangements each case must be examined in the light of its own facts, as stressed in paragraph 2.4.19 of the Assessing Handbook. Matters of importance would include whether the factoring entity has adequate funds to purchase the debts, whether the discount rate is reasonable taking into account whether debts are paid promptly and bad debts' patterns, what genuine commercial benefits are sought and generally whether the arrangement is commercially realistic. COMMISSIONER OF TAXATION 15 June 1989




Date of effect: Immediate


Related rulings: IT 276 2432
Legislative references: 25(1) 51(1) 260 Part IVA
Subject references: FACTORING OF DEBTS ASSIGNMENT OF DEBTS OF MEDICAL PRACTICE FAMILY TRUST - DEBTS ASSIGNED TO