A debt is forgiven if you are freed from the obligation to pay it. 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 base and reduced cost base 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 2002, Josef had available net capital losses of $9,000. On 1 January 2003, he sold shares he had owned for more than 12 months for $20,000. They had a cost base (no indexation) of $7,500. On 1 April 2003, 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 net capital losses |
$9,000 |
less debt forgiveness adjustment |
$9,000 |
Adjusted net capital loss |
Nil |
Cost base of shares (no indexation) |
$7,500 |
less debt forgiveness adjustment |
$6,000 |
Adjusted cost base |
$1,500 |
Sale of shares |
$20,000 |
Adjusted cost base (no indexation) |
$1,500 |
less carried forward loss |
Nil |
Capital gain (eligible for discount) |
$18,500 |
less discount percentage (50%) |
$9,250 |
Net capital gain |
$9,250 |
End of example