ATO Interpretative Decision
ATO ID 2003/268
Income Tax
Commercial debt forgiveness: reduction in gross forgiven amount - calculating net forgiven amountFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Where a 'commercial debt' is forgiven and an amount is included in the debtor's assessable income as a result of the forgiveness of the debt, is the gross forgiven amount of the debt reduced for the purposes of section 245-85 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. Paragraph 245-85(1)(a) of Schedule 2C to the ITAA 1936 reduces the gross forgiven amount by the amount included in the debtor's assessable income for the purpose of calculating the net forgiven amount.
Facts
The debtor is a relative of the principal shareholder in a private company.
The debtor entered into a loan agreement, on arm's length terms, with the company after 27 June 1996 for an amount of $16,500. The loan was for a period of 6 years and was used in the course of carrying on the debtor's retail business. The debtor had the capacity to pay the loan at the time it was provided.
On a later date, the company chose to forgive the full amount of the loan. The balance of the loan outstanding at the time the debt was forgiven was $13,247.
The gross forgiven amount of the debt was $13,247.
It was determined pursuant to Division 7A of the ITAA 1936 that the amount of debt forgiven was a dividend for the year of income in which the debt was forgiven.
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 27 June 1996.
The commercial debt forgiveness provisions of Subdivision 245-D of Schedule C to the ITAA 1936 determine reductions to the gross forgiven amount of any debt forgiven for the purpose of ascertaining the net forgiven amount of the debt.
Paragraph 245-85(1)(a) of Schedule 2C to the ITAA 1936 reduces the gross forgiven amount by any amount (excluding amounts under Division 245 of the ITAA 1936) that has been or will be included in the debtor's assessable income as a result of the forgiveness of the debt.
As a result of the forgiveness of the debt, the debtor has an amount of $13,247 included in assessable income for the year of income in which the debt was forgiven pursuant to Division 7A of the ITAA 1936.
The gross forgiven amount of the debt, that is, $13,247, is reduced to nil. Accordingly, the net forgiven amount of the debt is also nil.
Date of decision: 15 January 2003Year of income: Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1936
Schedule 2C
Division 245
Subdivision 245-D
section 245-85
paragraph 245-85(1)(a)
Keywords
Dealings & transactions
Debt forgiveness
Debt related transactions
Debt waivers
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 15 January 2003 | Original statement |
| 21 November 2008 | Archived |