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Edited version of your private ruling
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Subject: Capital gains tax - capital loss on investment
Question:
Do you disregard a capital loss on forgiving a debt owed to you by the trust?
Answer:
Yes.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts:
You set up a discretionary trust (the trust).
You loaned the trust money to invest with an independent third party to purchase shares.
You did not prepare a loan agreement with the trustee of the trust in relation to interest that would be payable by the trust to you.
You expected the investment would derive income and that this income would be distributed to you by the trust.
The investment was unsuccessful and the trust sold the shares at a loss.
The trust has no capital and no funds in any bank accounts that are available to repay the loan to you.
The trustee of the trust is being wound up.
You signed a deed of release with the trustee acknowledging that the loan will not be repaid.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 104-5
Income Tax Assessment Act 1997 Section 108-20
Income Tax Assessment Act 1997 Paragraph 108-20(2)(a)
Income Tax Assessment Act 1997 Paragraph 108-20(2)(d)
Income Tax Assessment Act 1997 Subsection 108-20(1)
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-25
Reasons for decision:
You can only make a capital gain or capital loss if a capital gains tax (CGT) event happens to a CGT asset.
When you made the loan to the trust you acquired a debt, which is a CGT asset. When you signed the deed of release forgiving the debt, a capital gains tax event C2 happened. Normally when a CGT event occurs a taxpayer will make either a capital gain or capital loss. However in some circumstances the resulting gain or loss may be ignored. In your case we need to consider whether your CGT asset is a personal use asset.
A personal use asset is a CGT asset that is used or kept mainly for your personal use or enjoyment. A personal use asset can include a debt resulting from your doing something other than in the course of gaining or producing your assessable income or from your carrying on a business.
You did not get any assessable income from the interest free loan; you are only assessable to a share of the trust's income if you were presently entitled due to the trustee exercising their discretion. You are not carrying on a business of lending money; therefore the loan you made to the trust is a personal use asset.
Accordingly, any capital loss you make from a personal use asset is disregarded. Therefore you cannot claim any capital loss on forgiving a debt owed to you by the trust.