Private ruling: On lent funds
Published: May 2013
Ruling period: Year ending 30 June 2012
Date scheme commenced: I July 2011

Ruling: Q1: Has a capital gains tax event occurred in relation to the money on-lent to the trust? | A1: No. | Q2: Are you entitled to a capital loss for unpaid money on-lent to the discretionary trust? | A2: No.


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: Detailed Reasoning - Capital gains tax provisions: A debt owed to you is a capital gains tax (CGT) asset (section 108-5 of the ITAA 1997). When a debt owed to you ends, CGT event C2 happens. The time of a 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, when it becomes irrecoverable at law). As the trust is still operating, it cannot be said that the trust will not pay the outstanding debt to you. The fact that entity A is bankrupt is not directly related to you. You had no loan agreement with entity A. Although this investment of the trust was not successful, as the trust is still operating, a CGT C2 event has not occurred for you. Therefore you are not entitled to a capital loss while the trust is still operating. Please note that when a capital loss happens under CGT event C2, subsection 104-25(3) of the ITAA 1997 specifies the capital loss is calculated by using the assets 'reduced cost base'. The reduced cost base of a CGT asset is defined under section 110-55 of the ITAA 1997. The reduced cost base does not allow interest expenses. Therefore interest expense incurred on borrowings in relation to the debt will not form part of the reduced cost base. As the debt recovery costs were incurred by the trust these expenses would not be included in calculating your reduced cost base.

Relevant facts: You are the sole beneficiary of a discretionary trust. | You borrowed funds and on-lent the funds to the trust. | The trust then on-lent the funds to entity A. A loan agreement was entered into between the trust and entity A. The trust charged entity A a higher rate of interest than you were paying. Under the loan agreement, the trust would pass on all interest repayments from the loan to you. | All income generated from this loan agreement would be distributed to you. You did not have a written loan agreement with either the trust or entity A. | Entity A was unable to make the required payments on the loan and the trust entered into a debt recovery arrangement. Entity A has since been declared bankrupt and you have been advised that the funds cannot be recovered. | No interest repayments and no capital repayments have been made by entity A. | You are not in the business of lending money.