Question

the Income Tax Act 2007

Oasis is a beauty consultant at Goodlook Ltd, and she owns 100% of the shares in this company. The companypays her a salary of $60,000 p.a.​

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.
Show all workings for your answer.
1.Will the Oasis Family Trust be assessable on the $100,000 loan forgiven? Is it a Financial Arrangement and what is Base price adjustment ?​
2. Can Jacky claim a deduction for the $100,000 loss? (sEW44 of the Income Tax Act 2007, Jacky is both a shareholder  and an employee​).

Answer 1

1. Will the Oasis Family Trust be assessable on the $100,000 loan forgiven? Is it a Financial Arrangement and what is Base price adjustment?

It is assessable with certain conditions. Jacky lent the loan to Trust for acquiring a warehouse, so Trust has an option to transfer the property to Jacky. A debt not payable is treated as an income and should be added to the taxable income. In this case, Trust is taxable to the extent of the Fair value of the warehouse greater than the forgiven debt. But we have to consider another fact that the tenant of the warehouse went bankrupt. IRS gives an exception to bankruptcy for canceled debts to exclude from gross income.

2. Can Jacky claim a deduction for the $100,000 loss?

Jacky can claim deduction under certain condition. If Jacky obtain the warehouse from Trust, he has to pay the tax on fair value of the warehouse. If Jacky doesn't obtain property, he can get an exception and send a Form 1099-C to trust as the tenant of the Trust went bankruptcy.