ATO Interpretative Decision
ATO ID 2003/546 (Withdrawn)
Income Tax
Commercial debt forgiveness: interest free loan provided by beneficiary of a discretionary trustFOI status: may be released
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This ATO Interpretative Decision 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.
Status of this decision: Decision Withdrawn 19 March 2010
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 in Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) apply to the forgiveness of an interest free loan made by a beneficiary of a non-fixed trust to the trust?
Decision
No. The loan does not constitute a commercial debt as defined in section 245-25 of Schedule 2C to the ITAA 1936 as interest payable in respect of the loan would not be deductible to the debtor under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
Creditor loaned funds on an 'interest free' basis to an associated entity, that is, Debtor.
Creditor is a beneficiary of Debtor, which is a non-fixed trust.
The loan by Creditor constituted a debt within the meaning of section 245-15 of Schedule 2C to the ITAA 1936.
At no stage over the term of the loan was interest payable by Debtor in respect of the loan.
Had interest been payable by Debtor it would not have been allowable as a deduction.
The Creditor formally forgave Debtor the amount of debt then outstanding.
Reasons for Decision
Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C applies where the forgiveness of a commercial debt occurs after 27 June 1996.
Pursuant to subsection 245-25(1) of Schedule 2C to the ITAA 1936 a debt is a commercial debt if subsections (2), (3) or (4) provide that the debt is a commercial debt.
As no interest was ever payable in respect of the debt subsection 245-25(2) of the ITAA 1936 is not enlivened. Furthermore, subsection 245-25(4) of the ITAA 1936 is not relevant.
Subsection 245-25(3) of the ITAA 1936 provides:
'A debt is a commercial debt if interest, or an amount in the nature of interest, is not payable in respect of the debt but, had interest or such an amount been payable, the whole or any part of the interest or amount:
As Debtor would not have been entitled to a deduction for any interest expense under section 8-1 of the ITAA 1997 (if charged), subsection 245-25(3) of the ITAA 1936 does not deem the forgiven debt to be a commercial debt.
Date of decision: 4 March 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 8-1
Schedule 2C, section 245-10
Schedule 2C, subsection 245-15(1)
Schedule 2C, section 245-25
Schedule 2C, subsection 245-25(1)
Schedule 2C, subsection 245-25(2)
Schedule 2C, subsection 245-25(3)
Schedule 2C, subsection 245-25(4)
Case References:
Taxation Case M36
80 ATC 280
24 CTBR (NS) 122
Related Public Rulings (including Determinations)
Taxation Ruling IT 2385
Keywords
Dealings & transactions
Debt forgiveness
Debt related transactions
Interest expenses
ISSN: 1445-2782
| Date: | Version: | |
| 4 March 2003 | Original statement | |
| You are here → | 19 March 2010 | Archived |