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  • Debt forgiveness

    Attention

    Warning:

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

    End of attention

    A debt is forgiven if you are freed from the obligation to pay it. A commercial debt that is forgiven may reduce your capital loss, your cost base or your reduced cost base. 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 year revenue losses
    • prior year net capital losses
    • deductible expenditure, and
    • cost bases 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.

    Example
    Debt forgiveness

    On 1 July 2000, Josef had available net capital losses of $9 000. On 1 January 2001 he sold some shares for $20 000. They had a cost base (no indexation) of $7500. On 1 April 2001, 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 carried forward losses

    9 000

    Less debt forgiveness adjustment

    9 000

    Adjusted available carried forward 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

    Discount capital gain

    18 500

    Less discount percentage (50%)

    9 250

    Net capital gain

    9 250

    Last modified: 31 Aug 2010QC 16195