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Debt forgiveness

Last updated 5 October 2009

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.

Start of example

Example: Debt forgiveness

On 1 July 2001, Josef had available net capital losses of $9,000. On 1 January 2002, he sold some shares for $20,000. They had a cost base (no indexation) of $7,500. On 1 April 2002, 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


less debt forgiveness adjustment


Adjusted net capital 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


Capital gain (eligible for discount)


less discount percentage (50%)


Net capital gain



End of example

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.