Tuesday, August 2, 2022

Took out a loan**? – what does this exactly mean?

Following on from posts over recent weeks concerning gift and loan back arrangements, a question has been raised as to what in fact is a loan.

In theory the definition of a loan should be simple, however it has over time caused some level of debate.

This said, the leading decision is generally accepted as the case of Federal Commissioner of Taxation v. Radilo Enterprises Pty Ltd (1997) 34 ATR 635. In this case it was confirmed that:
  1. A loan involves an obligation on the borrower to repay the sum borrowed.
  2. It is a simple contract whereby one person ('the lender') pays or agrees to pay a sum of money in consideration of a promise by another person ('the borrower') to repay the money upon demand or at a fixed date.
  3. The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid.
  4. The essence of the transaction is the promise of repayment.
  5. Ultimately therefore, a loan is a payment of money to or for someone on the condition that it will be repaid. Thus it is clear that an obligation to repay forms an integral and indispensable characteristic of a loan.
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** For the trainspotters, the title of today's post is riffed from the Black Rebel Motor Cycle club song 'Took out a loan’.

Listen here: