81. When will a debt be forgiven?
A debt is 'forgiven' when:
- the debtor's obligation to pay is released, waived or otherwise extinguished, except when the debt is discharged by payment in cash or a transfer of property
- recovery of the debt becomes statute-barred
- the debtor is effectively released from their obligation to pay, notwithstanding the existence of an agreement or arrangement which implies the debt remains on foot. Under some arrangements, the debtor's obligation to pay the debt, or part of the debt, may not cease immediately but at some time in the future. Nevertheless, the debt will be treated as forgiven immediately if the debtor and creditor are not acting at arm's length and they agree either that the debtor will not have to pay any consideration for the concessions granted by the creditor or will be required to pay merely a token amount. The agreement or arrangement need not be legally enforceable
- there is 'debt parking.' This is where the private company assigns its rights to receive payment of a debt to a new creditor, who is either an associate of the debtor or a party to an arrangement with the debtor in relation to the assignment, and a reasonable person would conclude that the new creditor will not exercise the assigned right, or
- a reasonable person would conclude that the private company will not insist or rely on the debt being paid.
If the same debt is forgiven at different times under different provisions of Division 7A, then only the first forgiveness is treated as a dividend.
(See subsections 109F(3), (4), (5), (6) and (8), section 245-35 of Schedule 2C, and the definition of 'extinguish' in subsection 245-245(1) of Schedule 2C.)
82. What types of debt forgiveness are not treated as dividends?
A debt forgiveness is not treated as a dividend where:
- it is made in favour of another company, unless the other company owed the debt in its capacity as trustee
- the debt is forgiven because the debtor becomes bankrupt or because of Part X of the Bankruptcy Act 1966
- the debt or part of a debt that has been forgiven results from a loan that has been treated as a dividend under sections 109D, 109E or 108 in the current income year or a previous income year, or
- the Commissioner exercises a discretion not to treat the debt forgiveness as a dividend.
If the debt forgiven was an amalgamated loan and in the income year the forgiveness occurred, the amount paid to the private company was less than the required minimum yearly repayment (MYR) then:
For income years preceding the 2006-07 income year
The amount of the amalgamated loan treated as a dividend is taken to be the amount of the loan that has not been repaid at the end of the income year.
The forgiveness of the debt is not treated as a dividend because the amount has been taken to be a dividend under another Division 7A provision, the provision relating to amalgamated loans.
For 2006-07 and later income years
The forgiveness of the debt is treated as a dividend. The amount of the dividend is:
- the amount of the amalgamated loan that has not been repaid at the time of the forgiveness
- any amount treated as a dividend in an earlier income year in relation to the loan due to a failure to make the required minimum yearly repayment in that year. Note: This reduction could only occur from the 2007-08 income year because the 2006-07 income year is the first year in which a shortfall in a minimum yearly repayment may be treated as a dividend.
In either case, the amount treated as a dividend is also limited by the private company's distributable surplus in the relevant income year.
(See section 109G.)
83. Do the Commercial Debt Forgiveness provisions in Schedule 2C apply to a debt forgiveness taken to be a dividend under Division 7A?
Yes. The commercial debt forgiveness provisions do apply. However, if the forgiveness of debt results in an amount being included in assessable income under Division 7A then the gross forgiven debt amount in the commercial debt forgiveness provisions is reduced by the deemed dividend that has been or will be included in the debtor's assessable income as a result of the forgiveness of the debt.
(See subsection 245-85(1)(a) of Schedule 2C and ATO ID 2003/268.)