Harmoney

[Harvey Specter]

As a matter of interest, for those with an investment with Harmoney, on average, what percent of your investment is in the Harmoney Investor Account (earning zero interest) compared to the proportion of your outlay invested in interest-earning "notes"?

It is probably much less than this in actuality, but if half your money with harmoney is sitting in the 0% interest account at any one time, then your xirr yield on your notes will need to be halved to get the yield on your total Harmoney outlay.

While it does take a while to get money invested, once fully invested, I would have less than 1% in the investor account at any one time. This does mean you need to check every day or two to see when you are over $25 and need to invest again. Loan notes are now closing quick now so it is very rare to have money sittin in the 'in funding' account for more than a day so that might be another 1% of the portfolio.

I actually had negative in my investor account at one point. I assume a deposit into my account was incorrect but by the time they reversed it, I was already reinvested.

The tax situation is interesting - I invest via a company which is in the business of investing (primarily shares on capital account) but also now loans via Harmoney ( the capital/revenue line is blurred by the FA rules). Will this allow the company to claim the bad debt since it is in the business of investing? Figures crossed for the next 44 or so days that I dont have to consider it for this tax year.

[unhuman]

The tax situation is interesting - I invest via a company which is in the business of investing (primarily shares on capital account) but also now loans via Harmoney ( the capital/revenue line is blurred by the FA rules). Will this allow the company to claim the bad debt since it is in the business of investing? Figures crossed for the next 44 or so days that I dont have to consider it for this tax year.

I would recommend speaking to your accountant, however I highly doubt it.

The structure of the investment does not matter; it is the intent behind each individual investment that is important.

i.e. if you buy shares or property with the intent to sell at a profit then that capital profit becomes income and thus taxable (what you currently have in your company).

This does not apply to Harmoney as there is no intent at the time of issuing each loan note to make a capital profit (no loanees will of course pay more than 100% of the principal).

The only intent at the time of issue is to purely receive interest income.

Thus only the gross interest, RWT paid and the management fee expense will apply to anyone’s tax return, regardless of structure.

The reasoning behind keeping shares that are on capital account separate in a different entity than shares that are on revenue account is purely for simplicity come accounting for tax payable. The structure itself does not influence how the investment is treated.

[Harvey Specter]

I would recommend speaking to your accountant, however I highly doubt it.

Agree.

I was more thinking along the lines of 'in the business of' rather than capital revenue. A bank can claim a deduction for bad debts because it is in the business of making loans, some of which are expected to go bad. That is exactly the same position as my company. As I said, I haven't looked at it at all but it does seem unfair where I am investing in something where I expect an x% default rate, that I cant get a bad debt deduction. Hopefully I never have to answer this question but I doubt it.

[unhuman]

Thats an interesting way to look at it, I would also like a definite answer.

In the UK at least deafults on P2P loans are capital, I would assume they would be the same here.

Zopa co-founder Giles Andrews says the way income tax is charged on peer-to-peer lending is unfair.
“It allows lenders to offset our fees against interest earned for tax purposes but not losses from bad debts,” he explains. “Obviously, the net returns would be much higher if lenders could do so and it’s something we have been lobbying for since we launched.”

http://www.ft.com/cms/s/0/854e01d6-8...#axzz3RrJcqpj2

[Bjauck]

Agree.

I was more thinking along the lines of 'in the business of' rather than capital revenue. A bank can claim a deduction for bad debts because it is in the business of making loans, some of which are expected to go bad. That is exactly the same position as my company. As I said, I haven't looked at it at all but it does seem unfair where I am investing in something where I expect an x% default rate, that I cant get a bad debt deduction. Hopefully I never have to answer this question but I doubt it.

As I understand them, under FA rules you do not necessarily have to be "in business" for capital profits to be taxable. So perhaps under FA you do not have to be in business to deduct delinquent "notes". However, since you may have seen quite a few notes being redeemed and invested in during the course of a financial year, perhaps that would be enough for you to actually be "in the Business" of dealing in the "notes"?

[Beagle]

Disc - As most of you know I'm an accountant. I am extremely reluctant to give an answer to this deductibility question as I am fairly sure this is something that will be subject to litigation with the IRD in due course. This isn't clear-cut and its an entirely new investment product. In my opinion much will depend upon the circumstances of each investors case. If you're clearly a professional investor and the size of your investment in Harmoney is substantial and spread over a substantial number of loans AND the level of proven bad debtors was significantly more than the expected delinquency rate as modelled by Harmoney I think there's a reasonably good arguable case that those losses are deducible under the general provisions of a necessarily incurred business expense. For smaller investors it could be possible to make a case that delinquent debtors are an ordinary and expected cost in making this sort of investment i.e. just like the commission that Harmoney take out.

[Harvey Specter]

Disc - As most of you know I'm an accountant. I am extremely reluctant to give an answer to this deductibility question as I am fairly sure this is something that will be subject to litigation with the IRD in due course.
I recommend you discuss this with your accountant.

Not worth a binding ruling (unless Harmoney did a product ruling) but maybe someone should submit a question for a QWBA (is there a formal way to do that or do they just answer what they want?).

For those wanting more info, I think this is the relevant section: http://www.legislation.govt.nz/act/p...LM1513650.html

Most punters would fall under subsection (2) (deduction limited to accessible income) but a deduction can be claimed for capital loss if you fall under subsection (3). The question being does holding hundreds of loan notes make you a person who "carries on a business for the purpose of deriving assessable income that includes dealing in or holding financial arrangements that are the same as, or similar to, the financial arrangement"

[Beagle]

Not worth a binding ruling (unless Harmoney did a product ruling) but maybe someone should submit a question for a QWBA (is there a formal way to do that or do they just answer what they want?).

For those wanting more info, I think this is the relevant section: http://www.legislation.govt.nz/act/p...LM1513650.html

Most punters would fall under subsection (2) (deduction limited to accessible income) but a deduction can be claimed for capital loss if you fall under subsection (3). The question being does holding hundreds of loan notes make you a person who "carries on a business for the purpose of deriving assessable income that includes dealing in or holding financial arrangements that are the same as, or similar to, the financial arrangement"

The bigger your investment in Harmoney the stronger your case that you are in business IMO.
Not sure Harvey. Lots of TIB's, (Technical Information Bulletin's) with questions we've been asked and answers...one wonders how many questions they've been asked that they haven't answered ???
There's so many variables. Anything from a single individual investing say $500 to a professional investor (company / individual, joint investor / trust) with a multi million dollar portfolio investing a six figure sum I'm not sure they would know the answer to a generic question of loss deductibility on this new investment product. Case law will surely develop over time.

[Harvey Specter]

. Case law will surely develop over time.

Not sure about that. hardly worth going to court for unless you are big (which means less likely to be disputed as in business).

[Bjauck]

I would have expected Harmoney to have sought legal advice as to what constitutes taxable income for an investor as they are obliged to deduct RWT from it.

On their Investor-faq page they state under "How is Forecast Annual Return (FAR) calculated?":
"... Forecast annual net income is interest less defaults and service fees. Defaults are calculated as the percentage of outstanding principal that is forecast to be written off as a bad debt over the next 12 months."

So it seems that Harmoney would consider actual net income to be interest less actual defaults and service fees. I am presuming that defaults are the value of delinquent notes. Would Harmoney consider that this actual net income be the taxable income to be entered on an investor's tax return?

I have sent an email on this point to investor enquiries. Eventually I got an answer which stated that Harmoney may choose to take legal action against defaulted borrowers to recover costs. In other words my question was not understood. Maybe someone else could send an investor enquiry on this point.