Private ruling: CGT - capital loss - loans (debt) - written off - forgiven (no legal impediment)
Date of advice: 29 February 2016
Published: April 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Did you make a capital loss when loans you provided to a related entity were forgiven? | A1: No.

Relevant facts and circumstances: You loaned funds to a related entity via non-interest bearing loans. You advanced the funds on the expectation that you would receive dividend income. There were no formal loan agreements between you and the related entity. You did not borrow any money or claim any interest in respect to the non-interest bearing loans. You wrote to the related entity indicating that you had forgiven the outstanding debt owed to you by it.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 subsection 104-25(1) | Income Tax Assessment Act 1997 section 108-5

Reasons for decision: Summary: You make a capital gain (or loss) if and only if a CGT event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). A capital gains tax (CGT) asset is any form of property or a legal and equitable right that is not property (section 108-5 of the (ITAA 1997)). A debt owed to you is an intangible CGT asset. CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset expiring or by it being released, discharged, redeemed, cancelled, abandoned, surrendered, or forfeited (subsection 104-25(1) of the ITAA 1997). The mere writing off of a debt without any legal impediment having been imposed on its collection is insufficient to constitute a cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law or in equity for the purposes of subsection 104-25(1) of the ITAA 1997. In your case, you have forgiven the debt owed to you by a related entity; however, there is nothing legally stopping you from pursuing repayment. As such, CGT event C2 has not yet happened and you are not entitled to claim a capital loss.