ATO Interpretative Decision

ATO ID 2007/167

Income Tax

Commercial Debt Forgiveness: whether a debt used to acquire a subordinated note can be a non-recourse debt
FOI status: may be released
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This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Whether a subordinated note can be 'property' for the purposes of determining if a debt is non-recourse for the purposes of section 245-60 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936).

Decision

Yes. The term 'property' in the context of section 245-60 of Schedule 2C to the ITAA 1936 is not limited to real property and can encompass financial instruments such as subordinated notes.

Facts

Debtor incurred the relevant debt in borrowing money from creditor.

Debtor used the relevant money to acquire a subordinated note.

The debt constituted a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936.

The debt was subsequently forgiven for the purposes of section 245-35 of Schedule 2C to the ITAA 1936 by creditor after debtor defaulted in payment of the debt.

Creditor's rights in respect of debtor's default were limited in the manner specified by subsection 245-60(1) of Schedule 2C to the ITAA 1936.

Reasons for Decision

Section 245-60 of Schedule 2C to the ITAA 1936 provides a special rule for working out the notional value of a non-recourse debt.

To constitute a non-recourse debt under that section the rights of the creditor in the event of default in the payment of the debt or the payment of interest must be limited in one or more ways listed in subsection 245-60(1) of Schedule 2C to the ITAA 1936. This is the case in the present circumstances.

Furthermore, the definition requires that the debt was incurred directly in respect of the financing of the acquisition, construction or development of property. In this instance the debt was incurred directly in debtor acquiring the subordinated note.

The term 'property' is not defined for the purposes of section 245-60 of Schedule 2C to the ITAA 1936 and therefore takes its ordinary meaning.

Date of decision:  29 June 2007

Year of income:  30 June 2007

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C, section 245-25
   Schedule 2C, section 245-35
   Schedule 2C, section 245-60
   Schedule 2C, subsection 245-60(1)

Related ATO Interpretative Decisions
ATO ID 2007/168

Keywords
Borrowings & loans
Commercial debt
Commercial debt forgiveness
Dealings & transactions
Non recourse loans

Siebel/TDMS Reference Number:  5606414

Business Line:  Public Groups and International

Date of publication:  24 August 2007

ISSN: 1445-2782