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Edited version of private advice

Authorisation Number: 1051571997077

Date of advice: 19 December 2019


Subject: Income tax - capital loss


Are you entitled to a capital loss for the guarantee payment made as guarantor on a loan?



Having considered your circumstances and the relevant factors, the Commissioner is satisfied that the debt which came to be owed to you in respect of the guarantee payment is not a personal-use asset, because it was objectively determined that the primary purpose of entering into the guarantee was to promote and enhance your income earning capacity. Therefore a capital loss is allowable for the total of the guarantee payment made by you.

This ruling applies for the following period:

Financial year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You purchased a commercial property (the property) in 19##.

You advised that Company A commenced leasing the property soon after it was purchased.

Company A manufactured a product from the property, which was solely distributed by Company B.

Using the property as collateral, you entered into a Guarantee and Indemnity agreement (the Guarantee) in 20##, in respect to a loan between borrower Company B and a financial institution.

Company B was unable to borrow funds in their own right, without you going guarantor.

Company B used the loan funds to meet operational expenses related to distributing the product of Company A.

You advised that the income generated as a result of the loan funds being applied, directly promoted and enhanced your income earning capacity, though the leasing of the property by Company A, resulting in lease income.

At the time you entered into the Guarantee, both Company B and Company A were solvent and in good operating condition.

Company B eventually came into financial difficulties and in 200# defaulted on the loan with an amount outstanding.

In 20## an Administrator was appointed for Company B, and the company was deregistered some time later.

As guarantor to the loan, you borrowed funds to satisfy the outstanding balance with the financial institution. The outstanding loan balance was repaid in full a number of years later.

Shortly after repayment was made in full, you were issued a statement from the financial institution releasing you from the obligations under the Guarantee.

You are not in the business of entering into contracts of guarantee, and you did not receive income from any party for entering into the Guarantor agreement.

Your sole source of income is through the leasing of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 108-20(2)