No Deduction or Capital Loss Allowed for Guarantee Arrangement

The AAT has dismissed a claim by tax payers that they should be entitled to deductions for the amounts of their apparent obligations under guarantees to a related trust.


The ATO has disallowed a $4.3 million capital loss claimed by a unit trust, resulting in increased distributions to two separate discretionary trusts (i.e., its unit holders) and their respective beneficiaries.

Although the taxpayers accepted that the unit trust was not entitled to the originally claimed capital loss, they objected to the relevant amended assessments, arguing that each discretionary trust unit holder was entitled to ether a deduction (or a capital loss), equivalent to the additional income distributed from the unit trust.

This argument was on the basis that each of the discretionary truss had guaranteed a loan from another related trust, which the borrower was unable to service and that the lender had called on the discretionary trusts as guarantors to cover the outstanding loan amount.


Unfortunately for the taxpayers involved, the AAT held they had failed to provide satisfactory evidence as to the obligations of the guarantors and, indeed, whether the guarantors were formally required to perform whatever obligations where though to have been created by the Deed of Guarantee.

Thus, the Tribunal rejected by the taxpayers’ argument, and affirmed the relevant amended assessment, and the 50% administrative penalty for recklessness.

Is it possible to make a claim for a guarantee payment?

Although the Tribunal’s decision was made based on the lack of evidence, it is worth noting that claiming deductions for payments made under a guarantee can be difficult, even with the required level of evidence.

As a rule, the most likely scenario where a tax deduction would be available for a payment under a guarantee arrangement is for taxpayers who are in the business of providing guarantees for a reward.

In most other (more common) circumstances, a guarantee payment will generally be considered capital in nature.

To claim a capital loss, however, such a payment must still be incurred in producing the assessable income of the guarantor (which is unlikely) so as not be classified as a personal use asset. Refer to Taxation Ruling TR 96/23

Ref: Carioti V FCT [2017] AATA 625




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