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Edited version of private ruling

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Ruling

Subject: Capital gain or loss on the release of a loan

Question 1

Are you entitled to claim a capital gain or loss under section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) for the release of a debt owed to you?

Answer

Yes

This ruling applies for the following period:

Financial year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You borrowed money from a bank.

You entered a loan agreement with a borrower.

Under the loan agreement, the borrower receives the funds from the bank loan for the purpose of purchasing and starting up a business.

The borrower pays interest on the loan. The interest rate on the loan is charged at the same variable commercial rate as the interest rate the bank charges on your loan.

The borrower must pay the loan in full within the relevant financial year.

During the relevant financial year, the borrower's business closed down. You determined there was no chance of repayment from the sale of the borrower's business assets.

You have released the borrower from the debt during the relevant financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-25 and

Income Tax Assessment Act 1997 Section 108-5.

Reasons for decision

Summary

Are you entitled to claim a capital gain or loss under section 104-25 of the ITAA 1997 for the release of a debt owed to you?

A debt owed to you is an intangible capital gains tax (CGT) asset. CGT event C2 occurs on the date you released the borrower from the debt owed to you. At this time, you are entitled to declare a capital gain or loss.

Detailed reasoning

A debt owed to you is an intangible asset. It is a capital gains tax (CGT) asset under section 108-5 of the ITAA 1997.

Section 104-25 of the ITAA 1997 states that CGT event C2 happens to you if your ownership of an intangible CGT asset ends by the asset:

The event occurs at the time you enter into a contract that results in the asset ending.

ATO Interpretive Decision ATO ID 2003/215 Income Tax - Capital gains tax: CGT event C2 - debtor bankrupted considers the occurrence of a CGT event C2 in the context of a borrower becoming bankrupt. The mere writing off of a debt is insufficient to constitute a release, discharge, or satisfaction.

However, the debt may be extinguished by forgiveness under a deed of release, such that the owner of the debt is legally barred from collecting the debt.

When CGT event C2 occurs, you make a capital gain if the capital proceeds received from the end of the intangible CGT asset are more than its cost base. In contrast, you make a capital loss if the capital proceeds are less than the reduced cost base.

Application

You have taken out a loan from a bank. Under a loan agreement, you provided the borrower the funds from the bank loan, for the purpose of purchasing and starting up a business. The borrower agreed to pay the loan in full within the relevant financial year. The debt owed to you is an intangible CGT asset.

In this case, CGT event C2 occurs on the date you released the borrower from the debt owed to you. In the similar context of a bankrupt borrower, the release prevents you legally from collecting the debt. At this time, you are entitled to declare a capital gain or loss.

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