Show download pdf controls
  • Debt forgiveness



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

    End of attention

    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


    Less debt forgiveness adjustment


    Adjusted available carried forward loss


    Cost base of shares (no indexation)


    Less debt forgiveness adjustment


    Adjusted cost base


    Calculation of net capital gain


    Sale of shares


    Adjusted cost base (no indexation)


    Less carried forward loss


    Discount capital gain


    Less discount percentage (50%)


    Net capital gain



    End of example
    Last modified: 31 Aug 2010QC 16195