18.104.22.168 Recognised & Non-Recognised Liabilities of a Controlled Private Trust or Controlled Private Company
Date of effect
This topic has effect to controlled private trusts and controlled private companies from 1 January 2002.
In this topic
This topic contains information on the following:
- when a liability is not recognised,
- when a liability is recognised,
- secured loans,
- unsecured loans and floating charges,
- rules for 100% attributable controllers, and
- loans from recognised financial institutions.
Circumstances where a loan (1.1.L.65) to or debts owed by an entity will NOT be recognised as a liability of that entity are:
- where NO WRITTEN agreement exists which is signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties), AND
- loans from, or debts owed to, a person who is under 18 years of age.
A loan that is not recognised as a liability of an entity will still be considered to be a personal financial asset of the person making the loan and is subject to deeming (22.214.171.124).
It is open to the assessor to determine that a loan DOES NOT exist and that it was instead a transfer or gift of assets (1.1.L.65) to the entity.
Example: If there was no intention to repay.
Of course, in such a situation the deprivation (1.1.D.110) provisions could apply.
Act reference: SSAct section 9(1) Financial assets and income streams definitions, section 1207C Associates, section 1208K Individual disposes of asset to company or trust
Policy reference: SS Guide 126.96.36.199 Disposal of Assets to a Private Trust or Private Company On or After 01/01/2002
Loans to or debts owed by an entity will be recognised as a genuine liability of the entity and therefore allowed as a genuine deduction from the gross asset value of the borrowing entity if:
- they appear on the balance sheet, and
- they are made under a written agreement signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties), and
- they are not made by a person who is under 18 years of age, and
- considering the circumstances of, nature of and parties to the loan, the loan can be considered to be genuine and not created as part of a scheme to gain a social security advantage.
Note: Reasonable interest paid on loans will be accepted as a genuine deduction from the income of the entity, regardless of whether the loan is recognised or not, as long as the loan appears on the balance sheet.
Example: The current commercial interest rates would be reasonable for commercial loans. For non-commercial loans an interest rate of no more than 10% will be accepted as reasonable.
Note: Regardless of whether a loan is recognised as a liability of an entity or not, the value of the loan is considered to be a personal financial asset of the lender and is subject to deeming (188.8.131.52).
Loans secured against a specific asset/s (1.1.A.290) of an entity can only be offset in relation to the asset/s against which the loan is secured.
Example: A trust has assets totalling $580,000. The assets consist of a farm worth $500,000, which includes the principal home of the sole attributable stakeholder worth $100,000, and a holiday home worth $80,000. A liability of $100,000 is secured against the holiday home. Only $80,000 of the loan would be recognised as a liability. The excess $20,000 would not be recognised as a liability of the trust. Therefore the net attributable asset amount of the sole attributable stakeholder is $400,000 (total assets LESS the value of the principal home LESS the recognised liability).
Exception: If the $100,000 liability was a primary production (1.1.P.390) liability, the excess amount of $20,000 would be included when calculating the primary production aggregation amount.
Note: If the loan is secured against all the assets of the entity the loan must be apportioned before determining the net attributable asset amount.
Policy reference: SS Guide 184.108.40.206 Apportioning a Liability of a Controlled Private Company or Controlled Private Trust, 220.127.116.11 Aggregation Assessments of Controlled Primary Production Private Trusts & Private Companies
Unsecured loans & floating charges
Unsecured loans or loans secured by a 'floating charge' over all entity assets will be recognised as a liability of an entity if they are:
- made under a written agreement signed by all parties to the agreement and witnessed by a third party (associates are not considered to be third parties), and
- are NOT made by a person/s who is under 18 years of age.
Rules for 100% attributable controllers
Liabilities in respect of a person who is the '100%' controller of a private trust or private company will be allowed provided that they appear on the entity's balance sheet. Documentation of these loans is not required.
Recognised financial institutions
Liabilities in relation to financial institutions, banks and finance companies are to be allowed and will be considered adequately documented provided that the liability appears on the balance sheet. Further documentation such as a loan agreement or loan statement need only be requested if the assessor has doubts about the accuracy of the information provided on the balance sheet.
Act reference: SSAct section 1208E Attribution of assets, section 1208H Effect of unsecured loan on value of assets, section 1208J Value of company's or trust's assets etc