Personal or business purpose: the test that draws the line

The test, in the Code’s words

Section 5 of the Code sets the purpose test. Its subsection 4 says what “predominant” means:

“For the purposes of this section, the predominant purpose for which credit is provided is: (a) the purpose for which more than half of the credit is intended to be used; or (b) if the credit is intended to be used to obtain goods or services for use for different purposes, the purpose for which the goods or services are intended to be most used.”

National Credit Code, section 5(4)

ASIC’s licensing guide puts the first limb in one line: credit is provided predominantly for a purpose if over half of it is meant to go to that purpose.

The same subsection leans on another one. Section 5(3) says: “For the purposes of this section, investment by the debtor is not a personal, domestic or household purpose.” How that plays out for property and for shares has its own guide on investment and the Code’s line.

What the test looks at, and what it does not

ASIC’s responsible lending guide heads this part of its advice to lenders with a reminder to weigh the purpose, “not the kind of borrower or security”. Set out question by question, its guidance reads like this.

Four questions, as ASIC’s Regulatory Guide 209 answers them

The question	What the guide says
Is the borrower a person or a business?	Not decisive. A loan wholly or predominantly for a business purpose is outside the responsible lending obligations even when the borrower is an individual.
Is it secured over a home?	Not decisive either. ASIC’s example is a farmer who borrows for essential repairs to the farm and feed for stock: that loan is for business purposes, ASIC says, and is not regulated, whether or not the farmer’s home is the security.
Did the borrower sign a declaration?	A declaration is evidence, but ASIC says it is “not irrefutable evidence of the purpose of the loan”.
What did the lender ask?	ASIC says the purpose should be known or found out by reasonable inquiry.

The purpose declaration

Section 13 of the Code, headed “Presumptions relating to application of Code”, deals with declarations a borrower makes, and ASIC discusses them in its guidance on a loan’s purpose. Four rules shape how much weight one carries.

1. It must be in the right form

   The Code says: “A declaration under this section is to be substantially in the form (if any) required by the regulations and is ineffective for the purposes of this section if it is not.”

2. It fails if the lender knew, or would have known by asking

   ASIC’s guide says these declarations are ineffective if the lender knew or had reason to believe, or would have known or had reason to believe had it (or a prescribed person) made reasonable inquiries, that the credit was really to be applied wholly or predominantly for a consumer purpose.

3. A lender that asks nothing is on weak ground

   Citing the Explanatory Memorandum, ASIC warns that a lender which never asks how the money will be used “will find it difficult to rely on a declaration” if the money in fact went to a Code purpose.

4. Inducing a false one is an offence

   The Code says: “A person commits an offence if: (a) the person engages in conduct; and (b) the conduct induces a debtor to make a declaration under this section that is false or misleading in a material particular; and (c) the declaration is false or misleading in a material particular.” The penalty it sets is 2 years imprisonment.

When one loan has more than one purpose

The two limbs of section 5(4) are the Code’s answer to a loan that does two jobs. Where the money itself is divided between uses, the first limb looks at which purpose more than half of the credit is intended for. Where the money buys goods or services that will serve several uses, the second limb looks at the use they are intended to be put to most. Both limbs look at intended use, not at the label a loan is given.

Security is handled with the same care. The Code applies to a mortgage if it secures obligations under a credit contract or a related guarantee and the mortgagor is a natural person or a strata corporation. In the Code, a credit contract is one for credit “to which this Code applies”, so a mortgage securing only a business loan is not drawn in. The regulations may also exclude a class of mortgage from all or any of the Code’s provisions. When one mortgage secures other debts as well, the Code is precise about its reach:

“If any such mortgage also secures other obligations, this Code applies to the mortgage to the extent only that it secures obligations under the credit contract or related guarantee.”

National Credit Code, section 7(2)

Guarantees follow the same pattern. The Code applies to a guarantee of obligations under a credit contract given by a natural person or a strata corporation, and where the guarantee also covers other obligations, the Code applies to it “to the extent only that it guarantees obligations under the credit contract”.

If a dispute turns on which side of the line a contract falls, the Code starts from a presumption, explained in the guide to disputes for a small business borrower. And some credit sits outside the Code whatever its purpose: those exclusions are in what the Code leaves out.