Small business loans exemption from responsible lending obligations to be extended until 2026

What you need to know

• In 2020, a time-limited exemption was added to the National Consumer Credit Protection Regulations 2010 (National Credit Regulations) which effectively provided that small business loans are exempt from the responsible lending obligations in Chapter 3 of the National Consumer Credit Protection Act 2009 (Cth) (Act), so long as the credit provided is genuinely for the purposes of a small business operated by the consumer, and those business purposes are not minor or incidental (small business exemption). This small business exemption is currently due to expire on 3 October 2024.
• The government has released a draft of the Treasury Laws Amendment Instrument 2024: Small Business Exemption (Draft Regulations) for public consultation and feedback.
• If passed, the Draft Regulations will amend the definition of "exemption period" in the National Credit Regulations¹ to extend the existing small business exemption for a further two years (up to but not including 3 October 2026).

What you need to do

• If the small business exemption is extended, mixed-purpose loans to small businesses will continue to be exempt from the responsible lending obligations so long as there is a 'genuine' business purpose that is not minor or incidental.
• As long as this exemption remains in force, businesses can continue to apply the 'genuine purpose test' instead of the 'predominant purpose test' to determine if the loans provided to consumers for a small business are subject to the responsible lending obligations.

Responsible lending obligations

Chapter 3 of the National Consumer Credit Protection Act 2009 (Cth) (Act) sets out the responsible lending obligations which credit licensees must comply with. These obligations require lenders to, in summary, make reasonable inquiries about a consumer's financial situation (and their requirements and objectives), take reasonable steps to verify a consumer's financial situation, and make an assessment about whether the credit contract is "not unsuitable" for the consumer, before entering into credit arrangements with them.

The responsible lending obligations (and consumer credit laws more broadly) do not generally apply to business and commercial lending. However, these laws apply to mixed-purpose loans (for example, where a small business applies for a single loan which has both personal and commercial purposes) if the 'predominant' purpose of the loan is personal, and not business related.²

Small business exemption

In April 2020, the small business exemption was introduced to facilitate the flow of credit to small businesses in response to the COVID-19 pandemic. The exemption was initially only put in place for a period of six months but has since been extended three times and is currently due to expire on 3 October 2024.

The small business exemption applies to loans and increases to loans provided to consumers which are:

• genuinely for the purposes of a small business operated by the consumer (whether alone or with others); and
• those purposes are not merely minor or incidental in relation to the loan or the increase to the loan.

For the purpose of the exemption, a business is a 'small business' if:³

• the business has fewer than 100 employees; or
• either:
  i. the business' revenue for the previous financial year is $5,000,000 or less; or
  ii. if there was no time in the previous financial year when the business was carried on – the business' revenue for the current year is $ 5,000,000 or less.

Extending the small business exemption will provide an additional two years of data to help inform a future decision by the government on whether the exemption should be:

• made permanent; or
• allowed to expire; or
• modified to improve its effectiveness.

The government is inviting interested parties to provide feedback on the proposed extension of the small business exemption. The consultation period ends on 19 August 2024.

Authors: Mansi Gupta, Associate. 

_{1. Regulation 28RB(7)(b) of the National Consumer Credit Protection Regulations 2010.}

_{2. Section 5 of the National Credit Code.}

_{3. Regulation 28RB(7) of the National Consumer Credit Protection Regulations 2010.}