Non arms length loans - Deferred tax issues

Sometimes a related part or non-arms length loan may come to an end. And the final balance may not be repaid. It may be forgiven, called a gift...whatever. This may leave an assessable income adjustment for the taxpayer/s who claimed the interest deductions.

Think of it this way - You have overclaimed deductions over the life of the loan. The ATO can consider these a limited recourse loan. Limited recourse loans generally create concerns about deductible amounts.

Beware of arrangements where a loan is not repaid in full. Seek tax advice.

 

It should be the case that in most instances, the commercial debt forgiveness provisions will be the sole provisions to operate in the case of debt forgiveness, and then only if the debt is a commercial debt. A recent court decision and the understood attitude of some ATO officers that any gain is to be treated as revenue mean however, that forming the view that there are limited or no consequences of a forgiveness must be approached carefully.

If the entity being forgiven has revenue losses equal to the amount of the debt being forgiven the only consequence of the forgiveness should be to either eliminate or use those losses.

The forgiveness of the debt could be accomplished by deed or contract. It is most common for forgiveness to be documented by way of deed between the parties.

For the borrower what is important from a commercial debt perspective is not whether there was interest charged, but instead, whether, had interest been charged, such interest would have been deductible to any extent. If interest would have been deductible to some extent then the commercial debt forgiveness provisions can apply to the forgiveness.

A person being forgiven the amount owed by them can experience taxation consequences as a result of the rules dealing with: 

• Ordinary income tax; 
• Fringe benefits tax; 
• CGT; 
• Commercial debt forgiveness; 
• Division 7A; and
• Value shifting.

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