ATO Interpretative Decision
ATO ID 2001/301
Income Tax
Deductions and expenses: Bad Debt (Loan by beneficiary to trust)FOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer, a beneficiary of a trust, entitled to a deduction under section 25-35 or section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a loan made to the trust that will not be repaid.
Decision
No, the taxpayer, a beneficiary of a trust, is not entitled to a deduction under section 25-35 or section 8-1 of the ITAA 1997 for the loan made to the trust that will not be repaid.
Facts
The taxpayer, who is a beneficiary of a discretionary trust, lent an amount of money to the trust for use in a business venture being carried on by the trust. The loan was to be repaid with interest. As a beneficiary of the trust, the taxpayer is to receive distributions from the trust.
The business venture is unsuccessful and the loan is not repaid to the taxpayer.
The taxpayer has not brought the debt into account as assessable income and does not carry on a business of lending money.
Reasons for Decision
A deduction for a bad debt may be claimed under section 25-35 or section 8-1 of the ITAA 1997.
To qualify for a bad debt deduction under section 25-35 of the ITAA 1997, the debt, in addition to being bad, must satisfy two criteria:
- 1.
- There must be a physical writing off of the debt.
- 2.
- The debt must have been brought into account by the taxpayer as assessable income. This condition does not apply to taxpayers in the business of lending money.
As the taxpayer has not brought the debt into account as assessable income and does not carry on a business of lending money, the bad debt cannot be claimed as a deduction under section 25-35 of the ITAA 1997.
To qualify for a deduction under section 8-1 of the ITAA 1997, the loan must be incurred in gaining or producing assessable income, or in carrying on a business for the purpose of gaining or producing assessable income. In addition, the loss must not be of a capital, private or domestic nature.
If the loss is an ordinary incident of the taxpayer's income earning activities then the loss will be on revenue account. For example, a bad debt loss incurred by a financial institution would generally be expected to be a revenue loss (Taxation Ruling TR 92/18).
If the loan has been made in a private capacity (i.e., not business), the bad debt will not be deductible under section 8-1 of the ITAA 1997. The loan will not be regarded as an ordinary incident of the taxpayer's income earning activities, and will also be excluded from deductibility under the capital exclusion under paragraph 8-1(2)(a) of the ITAA 1997.
Whilst not deductible as a bad debt, a capital loss may arise under subsection 104-25(3) of the ITAA 1997 if the taxpayer releases the trust from the debt owed (CGT event C2).
Legislative References:
Income Tax Assessment Act 1997
section 8-1
paragraph 8-1(2)(a)
section 25-35
section 102-20
subsection 104-25(1)
Related Public Rulings (including Determinations)
TR 92/18
Keywords
Capital losses
Trusts
Trust beneficiaries
Discretionary trusts
Borrowing's & loans
Deductions & expenses
Bad debts
Date reviewed: 4 November 2016
ISSN: 1445-2782
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
