• Debt forgiveness

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    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.

    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

    $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

    Calculation of net capital gain

    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

    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.
    Last modified: 06 Oct 2009QC 27417