Question

Jacky Oasis is a beauty consultant at Goodlook Ltd, and she owns 100% of the shares in this company. The company pays her a salary of $60,000 p.a. She has a long term relationship with John Kennedy and they plan to get married one day. John does not hold any shares in Goodlook Ltd. The Oasis Family Trust owns and leases commercial property. The trust is a complying trust and the beneficiaries are Jacky and her two sons. Three years ago, Jacky lent the trust $100,000 at 0% interest to finance the acquisition of a warehouse. The loan was to be repaid in 2017. However, the tenant of the warehouse subsequently went bankrupt and the trust is unable to meet its outgoings. In July 2018, Jacky decided to forgive the loan made to the trust.

1. Will the Oasis Family Trust be assessable on the $100,000 loan forgiven? Show all workings for your answer.

2. Can Jacky claim a deduction for the $100,000 loss? Show all workings for your answer

Answer 1

Jacky, the owner of Goodlook Limited has provided a loan of $100,000 to Oasis Family Trust. The trust has defaulted in making payment of the loan amount to the lender consequent to which Jacky has waived off the liability of the trust and forgiven the loan. Thus, Oasis Family Trust has benefitted for the non-payment of loan amount.

Taking into consideration the fact that the borrower has benefitted for non-payment of loan amount thus, the trust is assessable on the $100,000 loan forgiven. Thus, $100,000 is to be consider as income of Oasis family trust while determining the tax liability of the trust.

Yes, Jacky can claim a deduction against the loan forgiveness amount of $100,000 as he has suffered a loss of the loan forgiven amount. It is important to note that the monetary benefit and monetary losses are the two most important considerations to determine the tax implications. The tax payers would be allowed t take deduction in case monetary loss for a transaction. In this case Jacky has suffered monetary loss as she has forgiven the amount of loan that she provided to Oasis Family Trust consequent to its failure to make repayment.    

Thus, $100,000 will be deducted from the revenue of Jacky to determine her taxable income for the year.