• Debt forgiveness

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    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    A debt is forgiven if you are freed from the obligation to pay it. A commercial debt which is forgiven may reduce your capital loss, your cost base or reduced cost base. Commercial debt forgiveness rules apply to debts forgiven after 27 June 1996. A debt is a commercial debt if part or all of the interest payable on the debt is, or would be, an allowable deduction.

    Under the commercial debt forgiveness rules, a forgiven amount may reduce, in the following order, your:

    • prior year revenue losses
    • prior year net capital losses
    • deductible expenditure
    • cost bases of assets.

    These rules do not apply if the debt is forgiven as a result of:

    • an action under bankruptcy law
    • a deceased person's will
    • reasons of natural love and affection.

    Example

    Debt forgiveness

    On 1 July 1999, John had available net capital losses of $9,000. On 1 January 2000 he sold some shares, which had a cost base (no indexation) of $7,500, for $20,000. On 1 April 2000, a commercial debt of $15,000 that John owed to ABC Pty Ltd was forgiven. John had no prior year venue losses and no deductible capital expenditure.

    John would work out what net capital gain to include in his assessable income.

     

    $

    Available carried forward losses

    9,000

    Less forgiveness adjustment

    9,000

    Adjusted available carried forward loss

    Nil

    Cost base of shares (no indexation)

    7,500

    Less forgiveness adjustment

    6,000

    Adjusted cost base

    1,500

    Calculation of net capital gain

    Sale of shares

    20,000

    Adjusted cost base (no indexation)

    1,500

    Less carried forward loss

    Nil

    Discount capital gain

    18,500

    Less discount percentage (50%)

    9,250

    Net capital gain

    9,250

    Last modified: 18 Sep 2009QC 18323