{"id":602,"date":"2020-07-09T05:21:04","date_gmt":"2020-07-09T05:21:04","guid":{"rendered":"http:\/\/www.acandcoaccountants.com.au\/?page_id=602"},"modified":"2020-07-09T16:05:31","modified_gmt":"2020-07-09T16:05:31","slug":"protecting-capital-losses-common-issues-with-related-party-loans","status":"publish","type":"page","link":"http:\/\/www.acandcoaccountants.com.au\/zh\/protecting-capital-losses-common-issues-with-related-party-loans\/","title":{"rendered":"PROTECTING CAPITAL LOSSES \u2013 COMMON ISSUES WITH RELATED PARTY LOANS"},"content":{"rendered":"<div data-elementor-type=\"wp-page\" data-elementor-id=\"602\" class=\"elementor elementor-602\" data-elementor-settings=\"[]\">\n\t\t\t<div class=\"elementor-inner\">\n\t\t\t\t<div class=\"elementor-section-wrap\">\n\t\t\t\t\t\t\t<section class=\"elementor-element elementor-element-d909b0c elementor-section-boxed elementor-section-height-default elementor-section-height-default elementor-section elementor-top-section\" data-id=\"d909b0c\" data-element_type=\"section\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t\t\t<div class=\"elementor-background-overlay\"><\/div>\n\t\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t<div class=\"elementor-element elementor-element-d1492e4 elementor-column elementor-col-100 elementor-top-column\" data-id=\"d1492e4\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap  elementor-element-populated\">\n\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t<div class=\"elementor-element elementor-element-0271997 elementor-absolute elementor-widget elementor-widget-heading\" data-id=\"0271997\" data-element_type=\"widget\" data-settings=\"{&quot;_position&quot;:&quot;absolute&quot;}\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h1 class=\"elementor-heading-title elementor-size-default\">\u6700\u65b0\u52a8\u6001<\/h1>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-element elementor-element-45acbf3 elementor-section-boxed elementor-section-height-default elementor-section-height-default elementor-section elementor-top-section\" data-id=\"45acbf3\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t<div class=\"elementor-element elementor-element-3c32a6f elementor-column elementor-col-100 elementor-top-column\" data-id=\"3c32a6f\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap  elementor-element-populated\">\n\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t<div class=\"elementor-element elementor-element-3ae0c08 elementor-widget elementor-widget-heading\" data-id=\"3ae0c08\" data-element_type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\">PROTECTING CAPITAL LOSSES \u2013 COMMON ISSUES WITH RELATED PARTY LOANS<\/h2>\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-element elementor-element-34127e6 elementor-section-boxed elementor-section-height-default elementor-section-height-default elementor-section elementor-top-section\" data-id=\"34127e6\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t<div class=\"elementor-element elementor-element-bd886d6 elementor-column elementor-col-50 elementor-top-column\" data-id=\"bd886d6\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap  elementor-element-populated\">\n\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t<div class=\"elementor-element elementor-element-5685371 elementor-view-default elementor-widget elementor-widget-icon\" data-id=\"5685371\" data-element_type=\"widget\" data-widget_type=\"icon.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-icon-wrapper\">\n\t\t\t<div class=\"elementor-icon\">\n\t\t\t<i aria-hidden=\"true\" class=\"far fa-clock\"><\/i>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-b470af6 elementor-absolute elementor-widget elementor-widget-text-editor\" data-id=\"b470af6\" data-element_type=\"widget\" data-settings=\"{&quot;_position&quot;:&quot;absolute&quot;}\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\"><p><strong><time class=\"news-meta-item news-meta-date\">10 July 2020<\/time><\/strong><\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-4999ad8 elementor-column elementor-col-50 elementor-top-column\" data-id=\"4999ad8\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap\">\n\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-element elementor-element-b4272fa elementor-section-boxed elementor-section-height-default elementor-section-height-default elementor-section elementor-top-section\" data-id=\"b4272fa\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t<div class=\"elementor-element elementor-element-02e8ed4 elementor-column elementor-col-100 elementor-top-column\" data-id=\"02e8ed4\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap  elementor-element-populated\">\n\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t<div class=\"elementor-element elementor-element-15b6fb4 elementor-widget elementor-widget-text-editor\" data-id=\"15b6fb4\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-text-editor elementor-clearfix\"><p>The last few months have been tumultuous for Australia and within the tax world, we have seen a raft of new legislation being introduced to save the Australian economy. However, in trying to stay agile and keeping up to date with the changes, we may lose sight of the usual hidden issues contained within our complex tax system. One of these is the\u00a0<em>\u201cpersonal use assets\u201d<\/em>\u00a0provision and its impact on the capital gains tax (CGT) treatment of loans advanced by individuals (or any other entity) to prop up struggling businesses.<\/p><p><strong>Scenario<\/strong><\/p><p>A beneficiary of a discretionary family trust, Bob, who essentially runs the business provides a loan to the Trust on interest free terms. This is the only loan Bob has provided to any person\/entity.<\/p><p>The purpose of keeping it interest free was so that Bob does not put undue stress on the operations of the Trust. As a result of COVID-19, the business can no longer trade and is wound up and the loan is forgiven by Bob to the Trust.<\/p><p>From the Trust\u2019s point of view, the commercial debt forgiveness (CDF) rules would apply and we have not considered them in detail here.<\/p><p>From Bob\u2019s point of view, he will have assumed that he will crystalise a capital loss on forgiveness of the loan but, herein, lies the main issue.<\/p><p><strong>The issues \u2013 personal use assets<\/strong><\/p><p>Capital losses made from personal use assets are ignored for CGT purposes and cannot be used to offset capital gains in the current or future financial years. Personal use assets include a debt (i.e. a loan receivable) which is not made:\u00a0<\/p><ul><li>in the course of gaining or producing assessable income; or<\/li><li>from carrying on a business.<\/li><\/ul><p>When providing an interest free loan, it may be difficult to establish a nexus between the loan and income producing activities because, simply put, there is no interest income. Bob\u2019s income from the Trust would ordinarily be a distribution of profit and it is unlikely there is a nexus between the loan and the profit distribution because Bob is not guaranteed to receive income from the Trust as the Trustee has discretion in how the income will be distributed (i.e. even if there is a profit, some other beneficiary may receive the income and not Bob).<\/p><p>In this circumstance, the ATO may take the view that Bob did not make the loan in the course of gaining or producing assessable income (or in carrying on a business) and any capital loss that would otherwise arise on forgiveness of the loan may be ignored because that loan could likely be considered a personal use asset.<\/p><p>Alternatively, had Bob charged interest on the loan, the loan would have been made in the course of gaining or producing assessable income (i.e. the interest) and the personal use asset provisions would not apply. If Bob carried on a business of providing loans, the loss may be allowable, but it is assumed this is not the case.\u00a0<\/p><p>Critically, the issue when making an interest free loan to a discretionary trust (as Bob has done above) is that no nexus can generally be established to generating future income.<\/p><p>What if the interest free loan was advanced by a shareholder to a company &#8211; would that change anything?<\/p><p>In\u00a0<em>FCT v Total Holdings (Australia) Pty Ltd<\/em>, the taxpayer was able to successfully argue that interest free loans were made in the course of producing assessable income. The argument put forward by the taxpayer was that it provided interest free loans to a subsidiary so that the subsidiary became profitable sooner which would allow it to pay dividends to the parent company and thereby created a nexus between the interest-free loan and the eventual dividend income the parent company will receive. This argument is used often where shareholders provide interest free loans to companies, but these principles should not be relied upon without considering the facts of each case separately. Care must be taken when a non-shareholder provides an interest free loan to a company as they would not ordinarily be able to rely on the principles in the Total Holdings case to establish a nexus to generating future income.<\/p><p><strong>Other issues &#8211; quantum of capital loss and the market value substitution rules<\/strong><\/p><p>If it is determined that the \u2018personal use asset\u2019 provisions do not apply, another lurking issue is the market value substitution (MVS) rules for both proceeds and cost base in respect of CGT assets. Where parties may not be dealing with each other at arm\u2019s length (common in related party dealings), the MVS rule can replace the cost base of a loan for the lender with the market value of the loan at the time of making it \u2013 meaning the cost base is limited to its market value at that time. This is important to consider because ordinarily the market value of the loan (the asset) will be dependent on various factors including the borrower\u2019s ability to repay the loan at the time the loan funds were disbursed.<\/p><p>Using the scenario above, if Bob\u2019s loan to the Trust was not considered a personal use asset, but at the time of making the loan there was little to no hope that the Trust had the capacity to repay him, the MVS rule may \u2018kick in\u2019 and reduce the value of the loan to a lesser amount (maybe even nil!). The market value would then be used in calculating the capital loss.<\/p><p>Where there are related party borrowings, a simple but useful question to consider is \u2013 would a third party such as a bank be comfortable with providing a loan under the same terms?<\/p><p><strong>Parting words<\/strong><\/p><p>Merely writing off (or journaling out) a loan in the financial statements is not enough to claim a capital loss &#8211; there needs to be a formal deed of release or another form of binding agreement between the lender and the borrower. The date of the agreement is of great importance as this would normally be the date the CGT event takes place and would determine which year the quantified capital loss would crystalise.<\/p><p>Further, the CDF rules (which are complex) and their application need to be considered by the borrower on release of the loan. The value of the loan under the CDF rules for the borrower generally mirror the outcome of the MVS rules for the lender.<\/p><p>Due to the impact of COVID-19 and business owners having to inject funds for say working capital, it is important that you consider these issues to \u201cprotect\u201d your capital losses or you may miss out. It\u2019s equally important to remember that these provisions could apply to any historical loans made. For business owners, these provisions can result in an even worse situation with no prospect of loan repayments and also no future capital losses.<\/p><p><b>Contact your AC &amp; Co Accountants specialist if you wish to discuss this in further detail.\u00a0\u00a0<\/b><\/p><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-81f27d3 elementor-button-warning elementor-align-right elementor-absolute elementor-widget elementor-widget-button\" data-id=\"81f27d3\" data-element_type=\"widget\" data-settings=\"{&quot;_position&quot;:&quot;absolute&quot;}\" data-widget_type=\"button.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-button-wrapper\">\n\t\t\t<a href=\"http:\/\/www.acandcoaccountants.com.au\/zh\/contact-us\/\" class=\"elementor-button-link elementor-button elementor-size-xs\" role=\"button\">\n\t\t\t\t\t\t<span class=\"elementor-button-content-wrapper\">\n\t\t\t\t\t\t<span class=\"elementor-button-text\">\u8054\u7cfb\u6211\u4eec<\/span>\n\t\t<\/span>\n\t\t\t\t\t<\/a>\n\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-60c2ed0 elementor-button-info elementor-align-left elementor-widget elementor-widget-button\" data-id=\"60c2ed0\" data-element_type=\"widget\" data-widget_type=\"button.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-button-wrapper\">\n\t\t\t<a href=\"http:\/\/www.acandcoaccountants.com.au\/zh\/information-centre\/\" class=\"elementor-button-link elementor-button elementor-size-xs\" role=\"button\">\n\t\t\t\t\t\t<span class=\"elementor-button-content-wrapper\">\n\t\t\t\t\t\t<span class=\"elementor-button-icon elementor-align-icon-left\">\n\t\t\t\t<i aria-hidden=\"true\" class=\"far fa-arrow-alt-circle-left\"><\/i>\t\t\t<\/span>\n\t\t\t\t\t\t<span class=\"elementor-button-text\"> \u56de\u5230\u6700\u65b0\u52a8\u6001\u4e3b\u9875<\/span>\n\t\t<\/span>\n\t\t\t\t\t<\/a>\n\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<section class=\"elementor-element elementor-element-88f0f42 elementor-section-boxed elementor-section-height-default elementor-section-height-default elementor-section elementor-top-section\" data-id=\"88f0f42\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t<div class=\"elementor-row\">\n\t\t\t\t<div class=\"elementor-element elementor-element-9606918 elementor-column elementor-col-100 elementor-top-column\" data-id=\"9606918\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-column-wrap  elementor-element-populated\">\n\t\t\t\t\t<div class=\"elementor-widget-wrap\">\n\t\t\t\t<div class=\"elementor-element elementor-element-dd26918 elementor-widget elementor-widget-spacer\" data-id=\"dd26918\" data-element_type=\"widget\" data-widget_type=\"spacer.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<div class=\"elementor-spacer\">\n\t\t\t<div class=\"elementor-spacer-inner\"><\/div>\n\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>","protected":false},"excerpt":{"rendered":"<p>Information Centre PROTECTING CAPITAL LOSSES \u2013 COMMON ISSUES WITH RELATED PARTY LOANS 10 July 2020 The last few months have been tumultuous for Australia and within the tax world, we have seen a raft of new legislation being introduced to save the Australian economy. However, in trying to stay agile and keeping up to date&hellip;&nbsp;<a href=\"http:\/\/www.acandcoaccountants.com.au\/zh\/protecting-capital-losses-common-issues-with-related-party-loans\/\" class=\"\" rel=\"bookmark\">\u9605\u8bfb\u66f4\u591a &raquo;<span class=\"screen-reader-text\">PROTECTING CAPITAL LOSSES \u2013 COMMON ISSUES WITH RELATED PARTY LOANS<\/span><\/a><\/p>","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"page-templates\/template-pagebuilder-full-width.php","meta":{"footnotes":""},"_links":{"self":[{"href":"http:\/\/www.acandcoaccountants.com.au\/zh\/wp-json\/wp\/v2\/pages\/602"}],"collection":[{"href":"http:\/\/www.acandcoaccountants.com.au\/zh\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"http:\/\/www.acandcoaccountants.com.au\/zh\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"http:\/\/www.acandcoaccountants.com.au\/zh\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.acandcoaccountants.com.au\/zh\/wp-json\/wp\/v2\/comments?post=602"}],"version-history":[{"count":9,"href":"http:\/\/www.acandcoaccountants.com.au\/zh\/wp-json\/wp\/v2\/pages\/602\/revisions"}],"predecessor-version":[{"id":748,"href":"http:\/\/www.acandcoaccountants.com.au\/zh\/wp-json\/wp\/v2\/pages\/602\/revisions\/748"}],"wp:attachment":[{"href":"http:\/\/www.acandcoaccountants.com.au\/zh\/wp-json\/wp\/v2\/media?parent=602"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}