ATO Interpretative Decision

ATO ID 2003/545 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database as it is a simple restatement of the law and does not contain an interpretative decision.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.

Issue

Is a debt owed by a taxpayer to a state revenue authority a commercial debt for the purposes of section 245-25 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) if interest paid or payable in respect of the debt is an allowable deduction?

Decision

Yes. The debt owing to the state revenue authority is a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936.

Facts

A taxpayer owed a debt to a state revenue authority on account of unpaid state taxes. Interest paid or payable in respect of the debt was an allowable deduction.

The state revenue authority forgave the debt on account of the taxpayer's inability to repay the debt and the minimal prospects of future debt recovery.

The taxpayer had carried forward revenue and capital losses as at the date of forgiveness.

Reasons for Decision

Subsection 245-25(2) of Schedule 2C to the ITAA 1936 provides that a debt is a commercial debt if the whole or any part of the interest paid or payable in respect of the debt is or would be allowable as a deduction to the debtor.

Subsection 245-25(4A) of Schedule 2C to the ITAA 1936 provides that 'A debt owed to the Commonwealth that arose under a law relating to taxation is not a commercial debt.' Paragraph 17(a) of the Acts Interpretation Act 1901 states that the expression 'the Commonwealth':

'means the Commonwealth of Australia and, when used in a geographical sense, includes the Territory of Christmas Island and the Territory of Cocos (Keeling) Islands, but does not include any other external Territory;'

Despite the integral nature of the states to the Commonwealth, it has been judicially determined that the states are distinct from the Commonwealth.

The explanatory memorandum that accompanied the Taxation Laws Amendment Bill (No.1) 1997 at paragraph 8.3 stated that the intended purpose of the new subsection 245-25(4A) is to:

'...make it clear that taxation debts due to the Commonwealth are not commercial debts. That will prevent the debt forgiveness measures from applying to a taxation debt due to the Commonwealth in the event that the debt is reduced or eliminated, e.g. by way of an amendment or withdrawal of an assessment. The amendment will apply to debts arising not only under the Act but also under other Commonwealth taxation laws e.g. Fringe Benefits Tax Assessment Act 1986 or the Sales Tax Assessment Act 1992.'

Accordingly, taxation debts due to state authorities are properly characterised as being different in kind to that of taxation debts due to the Commonwealth. It follows that commercial debts forgiven by state revenue authorities are not excluded from the operation of Schedule 2C to the Income Tax Assessment Act 1936 by virtue of subsection 245-25(4A).

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C, subsection 245-25(2)
   Schedule 2C, subsection 245-25(4A)

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