Disclaimer
You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051370647421

Date of advice: 6 July 2018

Ruling

Subject: Deduction for bad debts

Question 1

Are you entitled to a bad debt deduction under section 8-1 or section 25-35 of the Income Tax Assessment Act 1997 (ITAA 97) in the 20XX financial year for the loan amount not received?

Answer

No

Question 2

Are you entitled to a bad debt deduction under section 8-1 or section 25-35 of the Income Tax Assessment Act 1997 (ITAA 97) in the 20XX financial year for the capitalised interest on the loan amount not received?

Answer

No

Question 3

Are you entitled to a bad debt deduction under section 8-1 or section 25-35 of the Income Tax Assessment Act 1997 (ITAA 97) in the 20QQ financial year for the loan amount not received?

Answer

Yes

Question 4

Are you entitled to a bad debt deduction under section 8-1 or section 25-35 of the Income Tax Assessment Act 1997 (ITAA 97) in the 20QQ financial year for the capitalised interest on the loan amount not received?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2018.

The scheme commences on

1 July 2017.

Relevant facts and circumstances

You entered into a simple commercial loan agreement with Company 2 through Company 1.

At the same time a Loan agreement between you and Company 1 was signed for $XXX,XXX.

The loan is a revolving loan with no fixed lending period.

A couple of months later Company 1 confirmed to you the same day transfer of the amount of $XXX,XXX into Company 2’s bank account.

A month later an additional loan of $XX,XXX was paid from you to Company 1. Company 1 confirmed same day transfer of $XX,XXX to Company 2

Approximately 12 months after you loaned money to Company 1 the Supreme Court of a relevant State ordered an accountant from a big accounting firms (the Liquidator) to be appointed Liquidator of Company 2.

A few weeks later you were informed by letter of the appointment the Liquidator for Company 2.

You pursued the amount owing from Company 1 with a letter of demand. After a lengthy investigation you also became aware that Company 1 did not have indemnity insurance.

Over this period of time the directors of Company 1led you to believe that the debt would be paid back in full.

You were advised that the bad debt could not be settled or realized in total until the final distribution was made and the bad debt written off.

Approximately five years after the Liquidator was appointed you were informed by letter from the Liquidator that a final dividend payment will be paid.

The final dividend payment from Company 2 to Company 1 was paid to the Australian Securities and Investment Commission (ASIC).

You did not receive any final dividend payment or any other payment in regard to the debt from either Company 1 or Company 2.

You want to claim the full principal amount of $XXX,XXX as a bad debt.

You want to claim the capitalised interest amount of $XXX,XXX as a bad debt.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 8-10

Income Tax Assessment Act 1997 section 25-35

Income Tax Assessment Act 1997 Division 12

Reasons for decision

Summary

It is accepted that you have taken necessary steps to write off as a bad debt the debt owing to you by Company 1 and as a result can claim the debt as bad.

You were informed by the liquidator that a final distribution will be paid towards the end of the 20XX year. As a result of this final distribution notice you are required to realise the debt after the payment has been made.

You are able to claim as a bad debt the loan amount and the capitalised interest in your 20QQ income tax return.

Detailed reasoning

A deduction for a bad debt may be allowable under either section 25-35 or section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Taxation Ruling TR 92/18 Income tax: bad debts clarifies the circumstances in which a deduction for bad debts is allowable.

Section 8-1 of the ITAA 1997 deals with general deductions and provides the circumstances where you may deduct from your assessable income, certain losses or outgoings. This section states that you may deduct losses or outgoings to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

However, certain exclusions exist to prevent you from deducting a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your *exempt income; or

(d) a provision of this Act prevents you from deducting it.

Section 8-10 of the ITAA 1997 indicates that if more than one provision applies, the most appropriate provision should be used. If there is a more specific section, it would be the section most appropriate.

Division 12 of the ITAA 1997 sets out particular types of deductions that are dealt with by a specific provision of either the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997. In particular, Division 12 lists that the rules in relation to deduction of general bad debts are provided for by section 25-35 of the ITAA 1997.

Subsection 25-35(1) of the ITAA 1997 provides the circumstances that must exist so that you can deduct a bad debt that you have written off in an income year. These circumstances are:

(a) it was included in your assessable income for the income year or for an earlier income year; or

(b) it is in respect of money that you lent in the ordinary course of your *business of lending money.

In your case you loaned money to Company 1 who acted as an intermediary, or facilitator and transferred the money onto the end client Company 2.

You have stated that your only form of income in the past XX years has been by way of money lending.

You have tried to recover the outstanding balance loaned to Company 1 with a letter of demand and lengthy investigation.

However, as Company 2 was placed in the hands of a liquidator, by the Supreme Court, you had no option but to wait for the liquidator to investigate Company 2’s assets and finalise Company 2’s accounts.

Over this period the directors of Company 1 led you to believe that the debt would be paid back in full.

The processes involved in liquidating Company 2’s assets has been lengthy and outside your control. You were advised that you could not write of the debt as bad until after the final distribution was made.

You received correspondences from the liquidator that the final dividend payment was due and payable paid towards the end of the 201X year.

You were informed by letter from the Liquidator that a final dividend payment of approximately X.x cents per dollar will be paid.

You advised that the final dividend payment from Company 2 to Company 1 was paid to the Australian Securities and Investment Commission (ASIC).

You advised that it is more troublesome and expensive to pursue the money paid to ASIC from Company 2 than the amount you would receive.

You did not receive any dividend payment from the liquidator and therefore aim to claim the full amount of the loan plus the capitalisation of the interests as a bad debt deduction.

It is accepted that you have taken necessary steps to write off as a bad debt the debt owing to you by Company 1 and as a result can claim the debt as bad.

However, you were informed by the liquidator that a final distribution will be paid towards the end of the 20XX year and as a result of this final distribution notice you are required to realise the debt after this date.

You are able to claim as a bad debt the loan amount and the capitalised interest in your 20QQ income tax return.

Other relevant comments

We have not considered whether you were carrying on a business of money lending at the point in time you made a loan to Company 2 through Company 1 that you are now claiming as a bad debt deduction.