ATO clarifies tax treatment on deferred loans.

The Australian Tax Office has addressed uncertainty from small businesses concerned around how it will treat loans that have been put on hold during the coronavirus crisis.

On its website, the ATO said it considers a debt to be forgiven for tax purposes if, generally:

• The debtor is somehow relieved from the legal obligation to repay it.
• There is evidence that the creditor won’t insist on repayment or rely on the obligation for repayment.

However, if a creditor only postpones an amount payable and the debtor acknowledges the debt, a debt is not considered forgiven unless there is evidence that the creditor will no longer rely on the obligation for repayment.

In relation to debt forgiveness of Division 7A loans, a debt forgiven by a private company is considered a deemed dividend.

“A debt is forgiven if a reasonable person would conclude a creditor will not insist on payment or rely on the borrower’s obligation to pay,” the ATO said. “Without more, allowing more time to repay a debt due to COVID-19 will not result in the debt being treated as forgiven.”

The clarification comes as the ATO made a draft ruling last week to address confusion around whether JobKeeper Payments received by businesses engaging in research and development (R&D) activities are deemed to be tax-deductible.

Businesses receiving a JobKeeper Payment for their paid employees trigger the “at-risk rule”. This means they cannot notionally deduct the portion of their wage expenditure incurred on R&D activities that has attracted the JobKeeper payment.

However, business owners receiving a JobKeeper Payment based on its own participation in R&D do not trigger the at-risk rule, meaning they are not prevented from notionally deducting expenditure for having received a JobKeeper Payment.

For further information visit the ATO website here.

Source: MyBusiness.com.au Article written by Adrian Flores.