Private ruling: CGT losses
Date of advice: 21 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2008

Ruling: Q1: Can you deduct the amount loaned to a development company as a bad debt? | A1: No. | Q2: Is the interest you paid on the loan you took out to on lend to the development company deductible? | A2: No.


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 | Income Tax Assessment Act 1997 subsection 110-25(1) | Income Tax Assessment Act 1997 section 110-55 | Income Tax Assessment Act 1997 section 112-20 | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 116-30

Reasons for decision: Summary: A debt may be written off as bad under section 25-35 of the ITAA 1977, if: ● it was included in your assessable income in the income year or an earlier income year, or ● if it is respect of money that you lent in the course of a business of lending money. As you do not meet either of these requirements, you may not deduct the debt under this provision. You claim that the GFC impacted the company’s ability to pay, however the interest payments were due monthly, and not one payment was ever received. The evidence you have provided does not show a business-like approach to following up the loan interest payment default, and when compared to those steps taken by a commercial lender appear to be inadequate. In the case where interest expenses are for an income producing purpose, where interest expenses are incurred prior to the earning of assessable income, Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities applies. TR 2004/4 states at paragraph 9 that in order to be deductible, continuing efforts must be made in the pursuit of the earning of assessable income. In conclusion, there were no continuing serious efforts made to recover the loan interest amounts owed. When viewed as a whole and considering the lack of a written agreement, the relationship between you and the loan recipient, and the lack of action following the default in payment, the loan appears to be private in nature; accordingly no deduction would be allowable under section 8-1 of the ITAA 1997.

Relevant facts: You borrowed from the bank to lend to a development company. | A relative was one of the two directors of the company, with a 50% holding. | The loan was interest only to be paid monthly, and the principal to be repaid when the proposed development was completed. | The agreement between you and the company was verbal, there was a meeting between yourselves and the directors of the company, and you depended on the company’s previous successful real estate developments for due diligence. | You did not lend funds to the previous successful projects. | The loan to the company was unsecured. | The loan took the form of interest only, with the principal to be repaid on the completion and sale of the real estate development. | The global financial crisis interrupted the sources of finance for the company. | The company had considerable presales’ 10% of which was held in the company trust account. | You owned a percentage of the units in the Developments Unit Trust, for which you paid an amount. | No distribution was ever made by the trust, as the project was never completed. | The interest only payments were to be made to you monthly; this was established at the outset. | It was your intention from the outset to make a profit from the loan arrangement, with the interest charged being higher than that billed by the bank. | No interest loan repayments were ever made to you by the company. | The investment land was eventually sold by the bank to settle a debt of the trust. | The units in the trust now have no value, as advised by the trust’s accountant. | The company was the subject of a winding up order by the Australian Taxation Office, and was subsequently deregistered. | You were charging an interest rate higher than that of the bank loan, and had an expectation of making a profit from the interest only repayments. The interest rate would increase in line with any increase in your loan interest rate from the bank. | You sent a series of letters and typed invoices to the company setting out current outstandings, including an email, showing you were attempting to resolve a rapidly deteriorating situation. | No distributions were ever made by the trust, as the project was not completed. | There was a reference to a percentage profit share from the build to be attributed to you. | There was no agreement in relation to the repayments not being made by the company. | The terms of your bank loan were interest only, it was a variable interest rate loan and there was no restriction on early repayment. | You had borrowed for this project, and you were trying to prepare for retirement. | You had no surplus funds to repay the bank for the loan until you sold some assets, and the debt was paid on settlement. | The interest charged to the development company was always set at a rate higher than that charged by your bank to you for the loan. | You are not in the business of lending money. | Your bank loan was repaid before one of the principals passed away.