Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 2 - Commercial debt forgiveness
Summary of the amendments
2.1 Schedule 2 to the Bill will amend the commercial debt forgiveness provisions in the Income Tax Assessment Act 1936 (ITAA1936) to ensure that amounts of commercial debt that are forgiven will be applied, where relevant, in reduction of a debtor's prior year net capital losses in respect of all years before the forgiveness year of income, rather than the immediately preceding year of income.
2.2 The Bill will also amend the capital gains tax (CTG) provisions to provide that, where a taxpayer incurs a net capital loss in a year of income earlier than the forgiveness year of income, and the loss is reduced by the operation of the debt forgiveness provisions, then the loss will also be reduced for the purposes of the CTG provisions.
2.3 Both of these amendments are consequential upon amendments contained in Taxation Laws Amendment Act (No. 2) Act 1997 (the No. 2 Act).
2.4 The amendments will apply to debts forgiven after the date of introduction. [Item 3 of Schedule 2]
Background to the legislation
2.5 The commercial debt forgiveness provisions, contained in Schedule 2C of the ITAA 1936, apply to taxpayers who have been forgiven the whole or part of a commercial debt. Under the provisions in the existing law, a net forgiven amount is to be applied, in order, in reduction of the taxpayer's revenue losses, net capital losses, deductible amounts and cost bases of assets.
2.6 Where a net capital loss incurred by a taxpayer in a year of income is reduced by a net forgiven amount, the CTG loss provisions provide that only the reduced amount of the net capital loss is able to be recouped against future capital gains.
2.7 The rules governing the calculation of net capital losses were amended by the No. 2 Act so that net capital losses would attach to the year in which they were incurred. Previously, all prior year net capital losses lost their identity and were absorbed into the taxpayer's current year net capital loss.
2.8 Currently, subsection 245-105(6) of the commercial debt forgiveness provision, which deals with the reduction of net capital losses, provides that the forgiven amount of the debt will be applied in reduction of net capital losses in respect of the year of income immediately preceding the forgiveness year of income.
2.9 Further, subsection 160ZC(4E) of the CTG provisions, which is intended to ensure that only the reduced amount of a net capital loss can be recouped, only applies to a net capital loss which was incurred by a taxpayer in the immediately preceding year of income.
2.10 These provisions do not reflect the general treatment of net capital losses which has applied since the amendments made by the No. 2 Act came into effect. The proposed amendments will bring the commercial debt forgiveness provisions into line with the general net capital loss rules.
Explanation of the amendments
2.11 Amended subsection 245-105(6) will provide that the forgiven amount of a debt is to be applied in reduction of unrecouped net capital losses in respect of all years of income before the forgiveness year of income. [Item2 of Schedule 2]
2.12 Amended subsection 160ZC(4E) will provide that where a taxpayer incurs a net capital loss in a year of income earlier than the forgiveness year of income, and the loss is reduced by the operation of the commercial debt forgiveness provisions, the loss will also be reduced for the purposes of the CTG provisions. [Item 1 of Schedule 2]
2.13 These amendments will ensure that the debt forgiveness rules are consistent with the general net capital loss rules.