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Edited version of your private ruling
Authorisation Number: 1012459309218
Ruling
Subject: Loss of investment monies
Question
Can you claim a deduction in relation to a loss incurred on your loan for a franchise investment?
Answer
No
This ruling applies for the following period
Year ended 30 June 2012
The scheme commences on
1 July 2011
Relevant facts and circumstances
During the year ended 30 June 2010, you invested in a franchise. You were required to pay the franchiser a shareholder loan, which was repayable over a 24 month period. The franchise suffered significant losses. You did not receive any repayment of your shareholder loan. During the year ended 30 June 2012, the franchiser purchased the franchise. A condition of the purchase agreement was you would forfeit your shareholder loan.
You were not in the business of money lending and the loan amount was not included in your assessable income in any earlier year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-35
Reasons for decision
As a general provision, section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.
A deduction for the amounts you loaned to the Bentley franchise is not allowable under section 8-1 of the ITAA 1997 as the amount you lent is an outgoing of a capital nature.
As a specific provision, section 25-35 of the ITAA 1997 allows a deduction for a debt (or part of a debt) that you write off as bad in the income year if:
(a) it was included in your assessable income for the income year or for an earlier income year; or
(b) it is in respect of money that you lent in the ordinary course of your business of lending money.
In your case, you cannot claim a bad debt deduction under section 25-35 of the ITAA 1997 for your shareholder loan loss because you were not in the business of lending money and the amount you loaned was not included in your assessable income in any year.
As neither section 8-1 or section 25-35 of the ITAA 1997 applies to your loan amount, you are not entitled to claim an income tax deduction for the $20,000
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