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Edited version of your private ruling
Authorisation Number: 1012551301496
Ruling
Subject: Director loans to company in liquidation
Question:
Will you make a capital loss in relation to your loan that your private company is unable to repay when your private company is deregistered?
Answer:
Yes
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
You made loans to your private company, which you will deregister, due to its trading losses. Your private company is unable to repay your loans.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Section 110-55
Reasons for decision
Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) explains a debt owed to you is a CGT asset.
Section 104-25 of the ITAA 1997 explains CGT event C2 happens when a CGT asset ends.
Section 104-25 of the ITAA 1997 further explains you make a capital loss if the capital proceeds from the ending of the CGT asset are less than the asset's reduced cost base.
The reduced cost base of a CGT asset is defined in section 110-55 of the ITAA 1997, which does not allow interest expense in its third element. Therefore, interest expense incurred on borrowings, in relation to a debt owed to you, will not form part of the reduced cost base.
(However, following the principles in Taxation Ruling 2004/4, interest, including on-going interest, incurred on borrowings may be a deductible expense.)
The time of CGT event C2 in relation to a debt owed to you will occur when you enter into the contract that results in the asset ending (for example, a settlement deed) or, if there is no contract, when the asset ends (for example, it becomes irrecoverable at law, when a company is deregistered).
In your case, your loans to your private company are CGT assets. When your private company is deregistered, the debts owed to you by the company will end due to becoming irrecoverable at law. It follows CGT event C2 under section 104-25 of the ITAA 1997 will happen to you, from which you will make a capital loss.