Edited version of private advice

Authorisation Number: 1051829864189

Date of advice: 29 April 2021

Ruling

Subject: CGT event C2 - capital losses

Question

Did you make a capital loss when loans you provided to a related entity were forgiven?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

A loan agreement was executed by you (the lender) providing a loan to a related party (the borrower) with the expectation to receive income.

The lender became aware the borrower was no longer able to repay the debt.

A minute was recorded and signed by the lenders which stated that the debt was forgiven.

A deed of release has not been signed by the parties.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

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

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

You can only make a capital gain or capital loss if a CGT event happens to a CGT asset (subsection 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Subsection 108-5(1) of the ITAA 1997 defines a CGT asset to be any kind of property, or a legal or equitable right that is not property. One of the examples provided in the notes to section 108-5 of the ITAA 1997 is a debt owed to the taxpayer. Thus, an unpaid loan would be considered to be a debt that is owing to a taxpayer.

CGT event C2 in section 104-25(1) of the ITAA 1997 happens if a taxpayer's ownership of an intangible CGT asset ends in certain ways, including because the asset 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 (subsection 104-25(2) of the ITAA 1997).

ATO Interpretative Decision ATO ID 2003/215: Income Tax Capital Gains Tax CGT event C2 - debtor bankrupt states 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 for the purposes of subsection 104-25(1) of the ITAA 1997.

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. It should be noted that a debt will not be extinguished if it is merely forgiven or abandoned without any legal impediment imposed on its collection.

In your case, you have forgiven the debt owed to you by a related party however, there is nothing legally stopping you from pursuing repayment. As such, CGT event C2 has not yet happened and you are not entitled to claim a capital loss.

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