ATO Interpretative Decision
ATO ID 2003/74
Income Tax
Commercial Debt Forgiveness - debt relating to exempt incomeFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Do the commercial debt forgiveness provisions contained in Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) apply where a debt incurred in relation to deriving exempt income is forgiven and any interest paid or payable in respect of the debt prior to the forgiveness is not deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The debt is not a commercial debt under section 245-25 of Schedule 2C to the ITAA 1936 because the interest paid or payable in respect of the loan is not deductible for reasons other than an exception provision.
Facts
The taxpayer executed a loan agreement with a lender after 17 June 1996.
Interest paid or payable by the taxpayer in respect of the loan is not deductible under section 8-1 of the ITAA 1997 because it is solely incurred in deriving exempt income.
Some months after the agreement was executed the lender formally forgave the loan for commercial reasons.
Reasons for Decision
Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C applies where a forgiveness of a commercial debt occurs after 17 June 1996.
The term 'commercial debt' is defined in section 245-25 of Schedule 2C to the ITAA 1936.
Paragraph 245-25(2)(b) of Schedule 2C to the ITAA 1936 provides that a debt is a commercial debt if the whole or any part of interest paid or payable in respect of the debt would be allowable apart from the operation of an 'exception provision'.
The term 'exception provision' is defined in subsection 245-25(5) of Schedule 2C to the ITAA 1936 as follows:
"exception provision"
means a provision of this Act that has the effect of preventing a deduction that would otherwise be allowable, but does not include paragraphs 8-1(2)(a), (b) and (c) of the Income Tax Assessment Act 1997 (which prevent deductions for capital, private or domestic outgoings and for outgoings relating to exempt income).
As outgoings relating to exempt income are specifically excluded from the definition of 'exception provision', the relevant debt forgiven is not a commercial debt for the purposes of Schedule 2C to the ITAA 1936.
Date of decision: 26 November 2002Year of income: 30 June 2002
Legislative References:
Income Tax Assessment Act 1936
Schedule 2C
section 245-10
section 245-25
paragraph 245-25(2)(b)
subsection 245-25(5)
section 8-1
paragraph 8-1(2)(a)
paragraph 8-1(2)(b)
paragraph 8-1(2)(c) Related ATO Interpretative Decisions
ATO ID 2003/73
Keywords
Debt waivers
Debt forgiveness
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 26 November 2002 | Original statement |
| 18 December 2009 | Archived |