A debt is forgiven if you are freed from the obligation to pay it. A commercial debt that is forgiven may reduce your capital loss, your cost base or your 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, and
- 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, or
- reasons of natural love and affection.
Example: Debt forgiveness
On 1 July 2000, Josef had available net capital losses of $9 000. On 1 January 2001 he sold some shares for $20,000. They had a cost base (no indexation) of $7,500. On 1 April 2001, a commercial debt of $15,000 that Josef owed to AZC Pty Ltd was forgiven. Josef had no prior year revenue losses and no deductible capital expenditure.
Josef would work out what net capital gain to include in his assessable income as follows.
Available carried forward losses |
$9,000 |
Less debt forgiveness adjustment |
$9,000 |
Adjusted available carried forward loss |
Nil |
Cost base of shares (no indexation) |
$7,500 |
Less debt 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 |
End of example