1012980811256 | Legal database

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Edited version of your written advice

Authorisation Number: 1012980811256

Date of advice: 4 March 2016

Ruling

Subject: Unrecoverable loan

Question and answer

Is the loss you made when your loan became unrecoverable a capital gains loss?

Yes.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You made a number of loans a number of years ago to a foreign company.

The loan was unsecured.

The company was deregistered.

The loan became unrecoverable when the company was deregistered.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 104-25(1)

Income Tax Assessment Act 1997 Subsection 104-25(3)

Income Tax Assessment Act 1997 Subsection 108-5(1)

Reasons for decision

Generally, 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, or relate to the earning of assessable income.

The debt owed to you by the Company is a CGT asset and therefore no deduction is allowable under the general provisions of the ITAA 1997 for a loss you make in relation to the debt.

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset (section 102-20 of the ITAA 1997).

A CGT asset is any kind of property, or a legal or equitable right that is not property (subsection 108-5(1) of the ITAA 1997). A debt is included in note 1 of subsection 108-5(1) of the ITAA 1997 as an example of a CGT asset.

Specifically, the debt owed to you by the Company is an intangible asset in your hands.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends because it expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. The time of the event is when a taxpayer enters into the contract that results in the asset, ending. If there is no contract, the event happens when the asset ends.

The mere writing off of a debt by a taxpayer is insufficient to constitute a cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law or in equity (subsection 104-25(1) of the ITAA 1997).

However, when a company is deregistered in accordance with the Corporations Law it ceases to exist. That is, the company's debt to you is 'abandoned, surrendered or forfeited' when it is deregistered.

When CGT event C2 happens, a capital gain is made if the capital proceeds from the ending are more than the assets cost base. A capital loss is made if those capital proceeds are less than the assets reduced cost base (subsection 104-25(3) of the ITAA 1997).

In your case, the balance of your loan to the Company is the amount of the capital loss that you incurred at the time the company was deregistered in the relevant income year.

Section 102-5 of the ITAA 1997 says that you should include your net capital gain for an income year in your assessable income. If you have a capital gain in any year, you may apply any past-year capital losses to reduce the gain.

An un-used capital loss may be carried forward to a later income year.

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