What is an intercompany loan?

Intercompany loans are loans that are made from one business unit of a company to another. Usually intercompany loans are made either to shift cash to a business unit that would otherwise have a cash shortfall, shift cash into a business unit where the funds are aggregated for investment purposes or to shift cash within business units that use a common currency.

When you create an intercompany loan, it should be documented properly, including the amount of the interest rate to be charged and repayment terms.

What is debt forgiveness?

Debt forgiveness is when commercial debts are waived. Forgiveness arises when the taxpayers obligation is released or otherwise extinguished, statute barred or subject to debt parking (debt assigned to a related party).

In Australia, commercial debt forgiveness rules apply to debts that are forgiven after 27 June 1996. Under these rules, a forgiven amount can reduce your prior income year revenue losses, net capital losses from earlier years, deductible expenditure or cost base and reduced cost base of assets.

The rules cannot apply if the debt is forgiven as a result of an action under bankruptcy law, in a deceased person’s will or for reasons of natural love and affection. The rules will also not apply if the debt is waived and the waiver constitutes a fringe benefit, the amount of debt has been included in your assessable income in any year or the debt is a tax-related liability.