Is this a CGT Event?

Hi,
Here is a situation i have at hand where i am not sure if its CGT event or not:

1- Loan extended to a friend (A) ~A$25,000. A invests the loan money into buying shares.

2- Interest paid to me @4.7% initially although it went down to 4.55% when RBA cut rates. Interest was paid out of dividends received by A.

3- Shares suffer loss of 20% and A repays me A$20,000 as he doesn't have any other liquid assets.

Nutshell: I suffer a loss of 5k.

My question: Is this a Capital Loss for me and can I offset it against the Capital Gain i have made elsewhere?

Thanks...

 

If you give up on collecting the loan then:

The loan is a cgt asset. Repayment of the loan is a disposal of the cgt asset.

You will make a capital loss on the loan. You can offset the loss against further, or current year, capital gains.

If you are in the business of money lending (and I will guess that you are not) then you can claim the loss as an income tax deduction.

The interest income paid to you is ordinary income and tax assessable.

Hope that is clear.

 

Thanks Ross for the quick response.

My accountant says that its not deductible against capital gain as it was to a friend and i am not in business of lending. My question: Do i apply for a private Binding ruling (or change accountant). Or is there section that i can refer to?

And yes, i have given up on the loan for sure.

 

I am not an accountant but I would imagine the ATO would want everything documented. That is, loan document, audit trail of trying to recover the money, etc.

 

Ask your accountant for their advice in writing.

 

Loan contract is documented however follow ups are not. There are no other assets to follow up on in the first place.

 

What. No letters of demand!! No emails?

 

Unfortunately not. As i said he has no other assets to liquidate to pay me off.

 

How do you know?

Surely some attempt should be made to recover the money.

Why would you lend $25K to someone with no assets? And to buy shares?

Sounds a bit odd.
Marg

 

Hi Marg,

An attempt was made but its all verbal.

However the point is: Is it relevant? The fact is that i received 5k less then what was given all through proper bank channels. No other monies received.

 

It will be relevant if the ATO suspects a sham or a dodgy tax write-off.
Marg

 

You want to claim a capital loss without any audit trail of trying to reclaim money that you are owed?

I am not a lawyer nor the ATO but I would be sending letters of demand, emails, etc if I was you.

 

Consider Part IVA. Is this a scheme in collusion with your friend?

 

Loan forgiveness is a tax event and a CGT event but nothing was forgiven.. Only a person who has income from lending can claim a tax loss for a bad debt PROVIDED the income was previously incl in assessable income...Hmm no CGT event no tax loss. Part IVA only applies to a tax benefit.. Nothing ventured nothing gained so not a IVA issue IMO.

I dont see a CGT event just a shortfall in a loan and no CGT event and no income event. Seek personal advice but you may have nothing to claim or consider. But you have assessable income if a div was declared ...not sure if that is constructive receipt I dont understand what that means. If you didnt receive interest maybe its not income no no loss occurs

 

Thanks everyone for the responses.

Income has been there and declared in the previous year by me as i was paid interest on the loan.

 

CGT event C2

Ending ownership of an intangible CGT asset by it being abandoned.

Suggestions by others is that no real attempt to collect implies the loan was a personal use asset. Capital losses from personal use assets are disregarded.

However, evidence that it was not for personal use is provided in your past tax returns declaring your interest income derived from the asset.

Gather as much evidence as you can to support your decision to refrain from pursuing the debt as a rational commercial decision.

e.g. having sought legal advice that costs of collection would exceed any potential recovery, lack of assets (liquid or otherwise), unlikely to renegotiate reasonable repayments terms, etc.

 

Exactly. If their is concern about evidence that a loan was made with interest, and the subsequent forgiveness, then a stat dec by the borrower and lender will be sufficient.

Simply not documenting a transaction does not mean it did not occur. At worst you could argue that the lack of documentation is poor business practice - but the tax outcome (capital loss) is the same.