Generally, loans that are the subject of division 7A under the Tax Act will be at call loans.
As the Tax Act deems loans that become unrecoverable due to the expiration of a limitation period to be automatically forgiven, it is important to determine the date on which a loan is deemed to begin.
Historically, there was at least some support for the argument that the start date for limitation period purposes was the date that a demand was made for repayment of the debt or the last date a formal acknowledgement (including by way of part payment) was made.
This position was at least partially due to the fact that under the relevant limitation legislation in each state, an acknowledgement must generally be made in writing by the debtor to the creditor, and be signed by the debtor
The decision in VL Finance Pty Ltd v Legudi [2003] VSC 57, which has been accepted by the Tax Office, confirms however that the limitation period for the purposes of division 7A begins to run immediately on the date that an at call loan is made, not from the time when the first call for repayment is made.
Furthermore, while at law a loan can be 're-established' by an acknowledgement or part payment even after the expiry of the limitation period, for tax purposes, under division 7A, if the limitation period expires the debt is immediately forgiven permanently at that point in time.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Pearl Jam song 'Big wave’.
Listen here: