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Anne
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1698
Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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Dear Sir/Madam,Over several years my mother and father

Resolved Question:

Dear Sir/Madam,

Over several years my mother and father as individuals and also one of their discretionary trusts loaned funds to me to investment in various business interests myself. This is almost comparative to a revolving loan that a financial institution provides. In this case money drawn as required with documentation accordingly and also and expectation of repayment.

The funds were either directed as follows:

BANK - PARENTS
PARENTS - ME
ME - TO MY OWN DISCRETIONARY TRUSTS as this is the way I set up my business operations i.e any venture is owned or currently own by a TRUSTEE on behalf of a DISCRETIONARY TRUST

I note that two of these enterprises (if we may refer to each business units this way0 whereby I was the sole shareholder and directory secretary in one instance for the entire period the business existed, and the other my mother was a director (unpaid) only never a shareholder of the trustee or beneficiary of the trust. Unfortunately these trusts were wound up and put into liquidation by the courts.

Some such funds remain on loan to other enterprises that to date have not become bad debts however may also follow suit not through liquidation rather than an inability to recover where it be internally or through the court system as covered by the income taxation rules.

1.5m to date has been provided by either of the two scenarios as noted above, and through the liquidation of the two entities a bad debt arrises which is clearly established by the liquidator for inclusion in the lending parties income tax return as a bad debt.

It is very clear and unquestionable that particularly the liquidated entities who never repaid these loan accounts due hence attracting a bad debt to the lender.

my primary objective is to ascertain if given I am in the belief that the bad debt write of is a capital loss to the lending party unless they are in the business of lending. In my view this is the case as the funds went to multiple entities and were also funds that came from income that was earned and taxed as income when earned by the lender, hence there must be grounds for the debt to be written off against revenue in preference to capital gains now or in the future.

The funds were never loaned with a view by my parent as making a capital investment and or return by the beneficiary purely and simply as a loan with the cost of the loan to the relevant party being the costs that were incurred to obtain the funds. With a provision of additional interest on top of these costs, being the cost of funding added by my parents i.e as a profit for the supply of the funds.

May i please ask your professional opinion on this matter as it would be greatly appreciated. I note that for example that in this particular example i believe a deduction has been missed by my parents which would have significantly reduced their tax liability with the following as an example:

2012 FINANCIAL YEAR

INDIVIDUAL A

GROSS TAXABLE INCOME - 855 523.00 less income tax

INDIVIDUAL B

GROSS TAXABLE INCOME - 606 239.00 les income tax

as you can see this would clearly be more beneficial as an income tax item rather than a capital item.

The only other thing that I question is that I read somewhere in some research that the CGT deduction can be utilised at an amount of 20 % per annum going forward for a period of four financial years (assumably this would be offset against income rather than capital events).

Thank you kindly for your assistance with this matter.
Submitted: 11 months ago.
Category: Tax
Expert:  Anne replied 11 months ago.
Hi

Thank you for using justanswer.

You stated "The funds were never loaned with a view by my parent as making a capital investment and or return by the beneficiary purely and simply as a loan with the cost of the loan to the relevant party being the costs that were incurred to obtain the funds. With a provision of additional interest on top of these costs, being the cost of funding added by my parents i.e as a profit for the supply of the funds."

I'm afraid that I'm not totally following what this statement is really saying. Was this a loan, or a gift?

1-If your parents truly loaned you the money, then there should be some sort of debt instrument stating that it was a loan, and any payment they received would be partially a return of their capital and the other part would be reportable interest.

If this is the case, then your parents could write off the loan as a bad debt. Since your parents did not invest in anything themselves (it was all through you) then this would be considered a personal bad debt for them, and they would be limited to the $3000 above any other capital gain they may have from their other investments.

For example: If your parents had $15,000 in capital gains, and they filed the loss on the money they gave you as a personal bad debt, they according to the capital loss rules, they could claim $18,000 in capital losses.

The balance of the bad debt would be carried over every year until it is used in full. Please see below:

Tax Topics - Topic 453 Bad Debt Deduction

If this money was a gift to you (and they should have filed form 709 in the year/years they "gifted" you the money) then unfortunately, there is no recourse for them, since there is no expectation that any of the money would be repaid if it is a gift.

Please see below:

Frequently Asked Questions on Gift Taxes

I truly hope this information is helpful but please do not rate until you are satisfied. If you want to click on 1 or 2 just click on the continue to work with me button instead. You will then be able to add any other info or respond to what I have posted so far. Rating 3-5 gives me credit and a good rating but you can still converse with me.

Customer: replied 11 months ago.

Hi There,


 


Thank you very much for responding to my query.


 


However I note that the documents you asked me to reference to were relative to the USA.


 


I am based in Australia, I believe we may be subject to different rulings.


 


NB. The loan was always a loan as documented in the beginning, and no debt forgiveness and or gifting is involved.


 


Regards,


 


John

Expert:  Anne replied 11 months ago.
I sincerely XXXXX XXXXX check where the question is coming from........and obviously missed doing that this time.

I am going to "opt out" which means that this question will now go back on the "open board" for any expert with knowledge of Australian law to answer.

Please do not respond to this posting, as it will only slow the process down.
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1698
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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