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Re: Intercompany Loan Write-Off - Non-Recoverable

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Enthusiast

Views 348

Replies 5

Hi

 

We have a client who operated 2 separate businesses under 2 separate companies.

 

One company (Company A) was successful, however, the other not so successful (Company B) incurring losses over a number of years.

 

Company B was eventually sold, and proceeds from sale of business was used to pay the ATO and other outstanding creditors.

 

To assist with business operations etc, Company A lent funds to Company B, however, Company B has been left with no funds to repay Company A.

 

We are looking to write-off the intercompany loan as non-recoverable.

 

My question is, do we treat this as:-

 

(1) Capital Loss for Company A and Capital Gain for Company B

or

(2) Capital Loss for Company A and apply the commercial debt forgiveness rules to Company b

or

(3) Other

 

I look forward to receiveing some guidance on this matter.

 

Thanks in advance

 

Dani1

1 ACCEPTED SOLUTION

Accepted Solutions
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Best answer

Community Manager

Replies 1

Hi @Dani1,

 

We've heard back from our technical experts on this.

 

To claim a capital loss, a CGT event needs to have occurred.  If Company A waives the debt of Company B this can be a CGT event for Company A. Merely declaring a debt as bad does not achieve this outcome. As long as the loan that was provided to Company B was done as part of Company A’s business activities or as part of producing income, such as interest being charged on the loan to Company B, then a capital loss can arise for Company A.  In this situation Company B would have to consider the application of the commercial debt forgiveness rules that may be relevant. If the commercial debt forgiveness rules apply they would firstly reduce revenue losses of Company B and then capital loss amounts, and then other amounts if the forgiven amount has not been fully applied.

 

Thanks, NateH

5 REPLIES 5
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Community Support

Replies 3

Hi @Dani1,

 

That's a great question.

 

We've asked our technical experts to look into this and we'll get back to you soon.

 

Thanks, NicM.

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Enthusiast

Replies 2

Thank you kindly @NicATO 

 

I look forward to your further advice.

 

Thanks in advance

 

Dani1

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Best answer

Community Manager

Replies 1

Hi @Dani1,

 

We've heard back from our technical experts on this.

 

To claim a capital loss, a CGT event needs to have occurred.  If Company A waives the debt of Company B this can be a CGT event for Company A. Merely declaring a debt as bad does not achieve this outcome. As long as the loan that was provided to Company B was done as part of Company A’s business activities or as part of producing income, such as interest being charged on the loan to Company B, then a capital loss can arise for Company A.  In this situation Company B would have to consider the application of the commercial debt forgiveness rules that may be relevant. If the commercial debt forgiveness rules apply they would firstly reduce revenue losses of Company B and then capital loss amounts, and then other amounts if the forgiven amount has not been fully applied.

 

Thanks, NateH

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Enthusiast

Replies 0

Thank you very much for coming back to me @NateATO !

 

Greatly appreciated.

 

Dani1

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Devotee

Replies 0

Basically it would be treated similar to a Bad Debt situation for company B so option 2 is probably the way to go