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Edited version of your written advice
Authorisation Number: 1012766342598
Ruling
Subject: Losses
Question
Are you entitled to claim a deduction for a loss made on a loan to a company?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2015
The scheme commences on
1 July 2014
Relevant facts and circumstances
You are the sole director and shareholder of a company.
The company required a capital injection to further the business capability.
You sold your property as a means of securing capital to loan to the company.
You have a loan agreement with the company.
The company has not been placed into liquidation or deregistered.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 subsection 104-5(1)
Income Tax Assessment Act 1997 section 108-5
Reasons for decision
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 exempt income.
Capital gains tax
Under section 108-5 of the ITAA 1997 an asset for capital gains tax (CGT) purposes is any form of property or a legal or equitable right that is not property. An example of a CGT asset is a debt owed to you.
Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.
Timing of the event
Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends by the asset:
(a) being redeemed or cancelled
(b) being released, discharged or satisfied
(c) expiring; or
(d) being abandoned, surrendered or forfeited
The time of the event is when you enter into the contract, that results in the asset ending or if there is no contract, 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.
Accordingly, CGT event C2 will not happen to the debt owed to you and you cannot claim a capital loss until the rights under the agreement are legally and irrevocably surrendered, released or abandoned and, as a result, all provable debts are released.
Application to your circumstances
In this case, you loaned money to the company. The debt owed to you by the company is considered a CGT asset. As the outgoing was capital in nature you are not entitled to a deduction.
Further, we do not consider that the debt has come to an end in the 2014-15 financial year as your rights to recover the money have not come to an end as contemplated by subsection 104-5(1) of the ITAA 1997.