No deduction or capital loss for apparent guarantee liability as a result of insufficient support

March 27, 2017

The Administrative Appeals Tribunal (AAT) has affirmed that two family trusts that were involved in a building and construction business with other related entities were not entitled to a deduction or a capital loss for $4.3 million that they claimed related to a guarantee liability. The AAT found that the documentary evidence and the oral evidence from the relevant trust controllers was not sufficient support for their claim that the guarantee obligation existed. The AAT noted that unusual features of the “guarantee deed” that put into question whether the trusts were genuinely subject to a guarantee obligation – including that the deed did not record any actions that the guarantors were to perform if the debtor defaulted.

DAA Commentary
It is very important, particularly where related entities are involved in transactions, that sufficient documentation exists to accurately support the nature and substance of a transaction. Please seek professional advice if you require assistance in preparing any necessary documentation.