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Re: Loan Write off - Related Party

Devotee

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Replies 4

Hi , Pls assist me on the below.

 

If a Company A lends to Company B ( a related party same directors/shareholders) and subsequently forgives the loan , how should each entity accounts for it under tax law ? 

 

Is it normal income for B and expense for A. ? 

Or is it capital gain for one and loss for the other ?

 

Does the condition whether interest has been charged  on the loan or not has an effect on the treatment of write off ?

 

Thank you

1 ACCEPTED SOLUTION

Accepted Solutions

Most helpful response

Devotee Registered Tax Practitioner

Replies 1

a) How to account in lenders return

 

The lender is forgiving the debt  -  https://www.ato.gov.au/Forms/Company-tax-return-instructions-2020/?page=35

 

b) Suppose the loan was interest free would it make any difference

 

Company to company  -  probably not.   

 

From ATO:

A debt is a commercial debt if any part of the interest (or an amount in the nature of interest) paid or payable on the debt is, or would be, an allowable deduction, or could have been deducted but for a specific exception provision in the ITAA 1997 (other than the exceptions in subsection 8-1(2) for outgoings of a capital nature, private or domestic outgoings and for outgoings relating to exempt income or non-assessable non-exempt income). Where interest is not payable in respect of the debt, it is still a commercial debt if interest would have been deductible if interest had been charged. The commercial debt forgiveness rules also apply to a non-equity share issued by a company.

https://www.ato.gov.au/Forms/Company-tax-return-instructions-2020/?page=35

 

The documentation is critical, so best to see a tax agent who has done it before.

 

4 REPLIES 4

Devotee Registered Tax Practitioner

Replies 3

If a Company A lends to Company B ( a related party same directors/shareholders) and subsequently forgives the loan , how should each entity accounts for it under tax law ? 

 

https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Debt-forgiven...

Devotee

Replies 2

@Bruce4Tax Thank you very much ,

 

If time permits please assist on the below 

 

a) How to account in lenders return

b) Suppose the loan was interest free would it make any difference

Most helpful response

Devotee Registered Tax Practitioner

Replies 1

a) How to account in lenders return

 

The lender is forgiving the debt  -  https://www.ato.gov.au/Forms/Company-tax-return-instructions-2020/?page=35

 

b) Suppose the loan was interest free would it make any difference

 

Company to company  -  probably not.   

 

From ATO:

A debt is a commercial debt if any part of the interest (or an amount in the nature of interest) paid or payable on the debt is, or would be, an allowable deduction, or could have been deducted but for a specific exception provision in the ITAA 1997 (other than the exceptions in subsection 8-1(2) for outgoings of a capital nature, private or domestic outgoings and for outgoings relating to exempt income or non-assessable non-exempt income). Where interest is not payable in respect of the debt, it is still a commercial debt if interest would have been deductible if interest had been charged. The commercial debt forgiveness rules also apply to a non-equity share issued by a company.

https://www.ato.gov.au/Forms/Company-tax-return-instructions-2020/?page=35

 

The documentation is critical, so best to see a tax agent who has done it before.

 

Devotee

Replies 0

Hi @Bruce4Tax  Thanks a lot .