Tax implications
Scenario:
My business partner and I provide plant and equipment to our company via loan accounts (i.e. $100,000). Are we able to gift these to the company thus not creating loans to ourselves? If so, how should this be reflected in the accounts and are there any tax implications as a result?
Explanation:
As you and your business partner are not earning assessable income from the plant, l assume that you are also not claiming capital allowances on the plant. A gift of the plant to the company would constitute a disposal of the asset and would be subject to CGT event A1. Because the directors and company are not acting at arm's length and no consideration is being provided (it is a gift), the market value will be substituted and the directors will make a capital gain (or loss) equivalent to the difference between the market value and original cost. The company will be deemed to acquire the plant at market value, bring the plant into its accounts at that value (and reducing the loan accounts by the same value) and depreciate the asset over its remaining effective life, Alternatively, under s 122-15, a roll-over can be obtained where a CGT asset is disposed of to a wholly-owned company
However, a roll-over can only apply where the company provides consideration in the form of shares in the company that have an equivalent market value to the asset disposed of. The effect of the roll-over on the taxpayers is that no CGT event arises on the disposal of the plant (a gain is instead deferred until the shares are sold). Meanwhile, the company will take over the plant at its original cost to the directors and will depreciate it over its remaining useful economic life. The shares would be funded by capitalising the existing loan accounts and converting them to equity.