One of our shareholders took out a loan from the company. However he has been seriously ill and unable to work for the company for some time and is struggling financially. The remaining shareholders want to forgive the loan. Is there a way we can do that so the forgiven loan is not considered a deemed dividend?
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Answer by LegalEagle staff, Melbourne 3000 VIC
- Yes there is. The Commissioner of Taxation has the discretion to not treat the debt forgiveness as a dividend provided that the Commissioner is satisfied that:
- the reason the debt was forgiven was because repaying it would have caused undue hardship to the shareholder owing the money;
- when the loan was initially granted the shareholder had the capacity to repay the loan; and
- the ability to repay the loan was lost due to circumstances beyond the control of the shareholder in question.
- You need to apply in writing to the Commissioner setting out the reasons why you or your shareholder will suffer undue hardship if an amount is treated as a dividend. The above points must be addressed in your letter for your application to be successful.