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Edited version of private ruling
Authorisation Number: 1011632011925
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
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Ruling
Are you entitled to a capital loss on the forgiveness of a loan to a company?
Yes
This ruling applies for the following period
1 July 2010 to 30 June 2011
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You have a 50% share in a company.
The company is experiencing financial difficulties.
You loaned the company funds to provide working capital.
You do not have a loan agreement with the company.
The company has made partial repayments on the loan.
The company has paid interest on the loan at commercial rates on a monthly basis.
You want to forgive the loan to the company to improve its financial position.
You will sign a deed of release.
You have no intention of pursuing the repayment of the loan at a later date.
Relevant legislative provisions
Corporations Act 2001 Paragraph 448C(1)(c).
Corporations Act 2001 Subsection 601AA(4).
Income Tax Assessment Act 1997 Section 104-25.
Income Tax Assessment Act 1997 Subsection 104-25(1).
Reason for Decision
A debt owed to you is a capital gains tax (CGT) asset (section 108-5 (2) of the Income Tax Assessment Act 1997 (ITAA 1997)). You make a capital loss if a CGT event happens in relation to the debt and the capital proceeds you receive are less than the reduced cost base of the debt.
CGT event C2 at section 104-25 of the ITAA 1997 can happen when your ownership of an intangible CGT asset ends by the asset being released, discharged, abandoned or surrendered. This will happen to the debt when the company is deregistered.
The mere writing off of a debt by a taxpayer is insufficient to constitute a cancellation, release, discharge, surrender or abandonment at law or in equity for the purposes of subsection 104-25(1) of the ITAA 1997. The debt will continue to exist until such time as the company is deregistered in accordance with subsections 509(5) and (6), 601AA(4) or other relevant provisions of the Corporations Act 2001 (CA 2001). Accordingly, CGT event C2 will happen at such a time.
Alternatively, the debt may be extinguished sooner by forgiveness under a deed of release such that the taxpayer is legally barred from collecting the debt. A debt will not be extinguished if it is merely forgiven or abandoned without any legal impediment imposed on its collection.