• CGT and debt forgiveness

    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 income year revenue losses
    • net capital losses from earlier years
    • 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
    • in a deceased person's will, or
    • for reasons of natural love and affection.

    Example

    On 1 July 2015, Josef had available net capital losses from earlier years of $9,000. On 3 January 2016, 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 2016, a commercial debt of $15,000 that Josef owed to AZC Pty Ltd was forgiven. Josef had no prior income year revenue losses and no deductible capital expenditure.

    Josef must use part of the forgiven commercial debt to wipe out his net capital losses from earlier years and the rest to reduce the cost base of his shares. He works out the amount of net capital gain to include in his assessable income as follows:

    Adjust net capital losses from earlier years:

     

    Available net capital losses from earlier years

    $9,000

    less debt forgiveness adjustment

    $9,000

    Adjusted net capital losses from earlier years

    Nil

    Adjust cost base:

     

    Cost base of shares (no indexation)

    $7,500

    less debt forgiveness adjustment

    $6,000

    Adjusted cost base (no indexation)

    $1,500

    Calculate net capital gain:

     

    Sale of shares

    $20,000

    less adjusted cost base (no indexation)

    $1,500

    less adjusted net capital losses from earlier years

    Nil

    Capital gain (eligible for discount)

    $18,500

    less discount percentage (50%)

    $9,250

    Net capital gain

    $9,250

     

    End of example

    See also:

    For help applying this to your own situation, phone 13 28 61

      Last modified: 21 Jun 2016QC 17162