ATO Interpretative Decision

ATO ID 2003/541 (Withdrawn)

Income Tax

Commercial debt forgiveness: meaning of 'debt' - legally enforceable obligation
FOI status: may be released
  • This ATO ID is withdrawn from the database as it is a simple restatement of the law and does not contain an interpretative decision.
    This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Is a loan a debt for the purposes of applying Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) where the debtor was not due to repay any amount in respect of the loan as at the time of forgiveness?

Decision

Yes. Subsection 245-15(1) of Schedule 2C to the ITAA 1936 whilst requiring that a 'debt' must be a legally enforceable obligation does not specify that a debtor must have a present liability to repay any amount in respect of a loan at the time of forgiveness for a loan to constitute a debt for the purposes of Schedule 2C.

Facts

Debtor borrowed money from Lender in the form of a loan.

After 27 June 1996 Lender forgave the loan.

At the time of forgiveness the term of the loan had not expired and the Debtor was not due to repay any amount in respect of the loan.

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.

Subsection 245-15(1) of Schedule 2C to the ITAA defines a debt for the purposes of Schedule 2C as:

Subject to this section, a "debt" is an enforceable obligation imposed by law to pay an amount to another person.

Subsection 245-245(1) of Schedule 2C to the ITAA defines "pay" as including repay.

Whilst the Lender could not legally force the Debtor to repay any part of the loan at the time of forgiveness, subsection 245-15(1) of Schedule 2C to the ITAA 1936 does not specify that any part of a debt must be payable or repayable as at the time of forgiveness.

A loan will constitute a debt where a Lender can legally enforce the terms of a loan should the Debtor default at any time.

Date of decision:  4 March 2003

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C, section 245-10
   Schedule 2C, subsection 245-15(1)
   Schedule 2C, subsection 245-245(1)

Keywords
Dealings & transactions
Debt forgiveness
Debt related transactions

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  11 July 2003

ISSN: 1445-2782

history
  Date: Version:
  4 March 2003 Original statement
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