Where a private company writes off (forgives) a debt owed by a shareholder or their associate (the debtor) the debt amount may be treated as a Division 7A dividend.
For the purposes of Division 7A, 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 as a result of its age
- the debtor is effectively released from their obligation to pay, notwithstanding the existence of an agreement or arrangement that implies the debt remains in force. For example, where the debtor's obligation to pay the debt doesn't cease immediately but at some time in the future, the debt is 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' – 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
- a reasonable person would conclude that the private company will not insist or rely on the debt being paid.
Debt forgiveness is not treated as a dividend where:
- it's 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 results from a loan that has been treated as a Division 7A dividend in the current or previous income years
- the Commissioner exercises discretion not to treat the debt forgiveness as a dividend.
Debt forgiveness – employees
While payments to shareholders and their associates in their capacity as employees or associates of employees of the private company are generally not treated as Division 7A dividends, debts forgiven to such parties may be treated as Division 7A dividends.
FBT doesn't arise where debt forgiveness is treated as a Division 7A dividend.
Next:Where a private company writes off (forgives) a debt owed by a shareholder or their associate the debt amount may be treated as a Division 7A dividend.