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Edited version of your written advice
Authorisation Number: 1012927348612
Date of advice: 17 December 2015
Ruling
Subject: CGT loss
Question
Are you entitled to a capital loss in the on the forgiveness of a loan to a company?
Answer
No.
This ruling applies for the following period(s)
Year ended 30 June 20XX
The scheme commences on
1 July 20XX
Relevant facts and circumstances
You are the sole shareholder and director of the company.
The company purchased a business.
You lent $XX to the company to purchase various assets for the business. This money was lent to the company interest free.
You worked in your business and received wages.
You also received fully franked dividends.
Sometime later the business was put on the market for sale. The business was closed while searching for a buyer. The business was sold after some time resulting in a capital loss for the company.
At the time of the sale the balance of your loan to the company was lower than the original amount. You forgave the debt at this time of sale.
After the sale of the business a resolution was made to wind up the company.
In the next financial year you began the process of winding up the company so that it can be deregistered.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 104-25
Income Tax Assessment Act 1997 section 108-5
Reasons for decision
Under section 108-5 of the Income Tax Assessment Act 1997 (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.
However, a capital loss is disregarded if it is in relation to a personal use asset (section 108-20 of the ITAA 1997). In your case it is accepted that your loan to the company is not a personal use asset as it was a debt arising in the course of gaining or producing your assessable income.
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 forgiveness or 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.
In your case, a CGT event has not yet occurred in relation to the debt owed to you at the point in time you forgave the remainder of the loan you had given to the company. Even though the business has been sold your contractual rights to receive the funds still exists. Therefore, you cannot claim a capital loss for the balance of the debt owed to you by the company as the debt has not come to an end.
Additional information
A capital loss can be claimed for a debt at a point in time when your contractual rights have ended. Examples of when this may occur include forgiveness under a deed of release such that the owner of the debt is legally barred from collecting the debt or when the company is deregistered.