Q: Two directors/shareholders want to transfer plant and equipment to their company through loan accounts ($100,000). Can they gift these assets to the company instead of creating loans for themselves? If yes, how should this be recorded in the accounts, and are there any tax implications?
A: Assuming the directors/shareholders aren't earning income from the plant and equipment, it's likely they're not claiming capital allowances on them either. Gifting the assets to the company would trigger a Capital Gains Tax (CGT) event known as A1. Since the directors and the company aren't dealing at arm's length and no payment is involved (it's a gift), the market value would replace the original cost. The directors would then make a capital gain or loss based on the difference between the market value and the original cost. The company would be deemed to acquire the assets at market value, which would reduce the loan accounts by the same value. The company would then record the assets in its accounts at market value and depreciate them over their remaining useful life.
Alternatively, under section 122-15 of the tax law, a roll-over can be applied when a CGT asset is transferred to a wholly-owned company. However, for this roll-over to apply, the company must provide consideration in the form of shares with an equivalent market value to the assets being transferred. This roll-over defers the capital gain until the shares are sold. Meanwhile, the company takes over the assets at their original cost, depreciating them over their remaining useful life. To fund the shares, the existing loan accounts can be capitalized and converted into equity.
