Anti-avoidance — what s.13(3) of the Code means in practice

The National Credit Code provides clear exemptions for business-purpose lending and lending to body corporate borrowers. But those exemptions are not unconditional. Section 13(3) of the Code is an anti-avoidance provision that exists to prevent people from using these exemptions to disguise what is, in substance, a consumer loan. Understanding this provision is essential for any borrower, broker, or funder operating in the private lending space. For the full text of the declaration every borrower signs, see our Business Purpose Declaration page.

What section 13(3) says

Section 13 of the National Credit Code deals with presumptions about whether credit is provided for a business or consumer purpose. Section 13(1) provides that if the debtor declares, before the credit contract is entered into, that the credit is to be applied wholly or predominantly for business or investment purposes, there is a presumption that the Code does not apply.

Section 13(3) then qualifies that presumption. It provides that a declaration under section 13(1) is ineffective for the purposes of the section if the credit provider (or a linked person, such as a broker who arranged the loan) knew, or had reason to believe, at the time the declaration was made, that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes.

In plain terms: signing a Business Purpose Declaration does not automatically make a loan exempt. If the lender or the broker knew the real purpose was personal, the declaration is treated as if it were never signed.

Why this provision exists

The consumer credit framework is designed to protect individuals who borrow for personal purposes. It imposes responsible-lending obligations, disclosure requirements, hardship provisions, and other safeguards. These protections exist because consumer borrowers are considered to have less bargaining power and less financial sophistication than commercial borrowers.

Without an anti-avoidance provision, it would be trivially easy to avoid the entire framework: just have the borrower sign a declaration saying the loan is for business purposes, regardless of what the money is actually for. Section 13(3) prevents that.

When a Business Purpose Declaration is ineffective

A BPD will be ineffective under section 13(3) if, at the time it was signed, the funder or the broker had actual knowledge, or had reason to believe, that the stated business purpose was not genuine. The trigger is the state of knowledge of the funder or broker, not just the borrower's subjective intention.

"Had reason to believe" is an objective test. It does not require the funder or broker to have turned a blind eye deliberately. If the circumstances would have put a reasonable person on notice that the funds were for personal use, the declaration is ineffective.

Examples of structures that would be caught

The following are illustrative examples of situations where section 13(3) could apply. These are not exhaustive, and every case turns on its own facts.

• —A newly formed company with no trading history borrows funds that are immediately on-lent or gifted to the director for personal use, such as paying off a personal credit card or funding a personal property purchase.
• —The stated purpose does not match the security. The borrower says the loan is for business working capital, but the security is the director's personal home and the funds are used to renovate it.
• —The company is a shell. It has no employees, no clients, no revenue, no business activity, and was set up immediately before the loan application. The sole director is also the sole guarantor and the person who will use the funds personally.
• —Mixed-purpose loan tilted toward personal use. The borrower says the funds are for a business project, but the documentation shows the majority of the funds are earmarked for personal expenses. A Business Purpose Declaration requires the purpose to be "wholly or predominantly" business — if the predominant purpose is personal, the BPD does not protect anyone.

The broker's obligation

Section 13(3) expressly refers to a "linked person," which includes a broker who arranged the loan. This means we, as the arranging broker, have an obligation not to arrange a loan where the stated business purpose appears to be a sham.

At Private Credit Loans (operated by Andorra Capital Solutions Pty Ltd), we take this obligation seriously. When we assess a scenario, we look at the borrower's entity structure, the stated purpose of the funds, the nature of the security, and whether the overall picture is consistent with genuine business-purpose borrowing. If it is not, we will decline to arrange the loan.

This is not a bureaucratic exercise. It protects the borrower (who could lose the benefit of the corporate structure if the declaration is found to be ineffective), the funder (who could find themselves subject to regulatory obligations they did not anticipate), and us as broker (who could face regulatory consequences for facilitating an avoidance arrangement).

What this means for borrowers

If you are a Pty Ltd borrower and your loan is genuinely for business or investment purposes, section 13(3) is not a concern. You sign the Business Purpose Declaration truthfully, the funds are used as stated, and the exemption operates as intended.

If you are considering setting up a company to borrow for what is really a personal purpose, section 13(3) is the provision that makes that strategy ineffective. The Code will apply as if the declaration were never signed, and the funder may be in breach of the NCCP Act for providing credit without a licence.

How to stay on the right side

• —Use a genuine entity with real business activity, not a shell created for the sole purpose of borrowing.
• —Make sure the funds are actually used for the stated business purpose.
• —If the purpose is mixed, ensure the business component is genuinely the predominant purpose.
• —Do not ask a broker or funder to look the other way. It puts everyone at risk.

For more detail on the Business Purpose Declaration and what it requires, see our Business Purpose Declaration page. To understand which borrowers we work with and why, visit who we help. If you have a genuine business-purpose deal to discuss, submit your scenario and we will review it.