Harry runs a small business through a company called Harry's Sales Limited . The company has faced difficulties repaying a $ 200,000 bank loan . After negotiations with the bank , it agrees to write - off $ 80,000 owing and for the company to start paying interest again on the remaining balance of $ 120,000 . His accountant , however , warns him that his company will have to pay tax on the $ 80,000 remitted due to the Base Price Adjustment .

Harry's wife borrowed $ 20,000 from her father last year which he has recently forgiven as she has just lost her job . She has been informed by Harry's accountant that she does not have to pay tax on the $ 20,000 her father forgave . Harry is very upset that his company has to pay tax when the bank remits his loan but his wife does not have to pay tax when her father forgives the loan from him .

Harry thinks either his accountant has got it wrong or that it is unfair his wife is favoured under tax law .

Required :

( a ) Explain whether you believe it is appropriate for any difference to be made in the tax treatment of loans in respect of amounts remitted / forgone as Harry suggests above .

( b ) Explain whether Harry's accountant has explained the tax law correctly in the above situation with reasons . Include statutory references where appropriate .

Answer rating: 100% (QA)

Whether there should be a difference in tax treatment of forgiven loans Yes a difference in tax treatment is appropriate in these two situations While ... View the full answer