ATO Interpretative Decision
ATO ID 2003/66 (Withdrawn)
Income Tax
Commercial Debt Forgiveness - trading stock - application of assessable income exclusionFOI status: may be released
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This ATO Interpretative Decision is withdrawn from the database because it contains a view in respect of a provision of the Income Tax Assessment Act that doesn't apply after the 2009-2010 income year. Despite its withdrawal from the database, this ATO Interpretative Decision continues to be a precedential view in respect of decisions for income years up to, and including, the 2009-2010 income year.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 debt incurred in respect of the purchase of trading stock excluded from the definition of 'debt' because of the assessable income exception in subsection 245-15(3) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. It is the debt incurred in acquiring the trading stock and not the proceeds of sale of the trading stock that must be included in the assessable income of the debtor for the exception in subsection 245-15(3) of Schedule 2C of the ITAA 1936 to apply.
Facts
A trading business acquired trading stock from an unrelated supplier (the supplier) in February 1998.
The trading stock was sold by that business in March 1998.
The business defaulted on payment for the trading stock.
The supplier subsequently made a commercial decision to forgive the debt of the business on 30 June 2000.
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 term 'debt' is defined in subsection 245-15(1) of Schedule 2C to the ITAA 1936 as '...an enforceable obligation imposed by law on a person to pay an amount to another person'.
The purchase of the trading stock by the business created an enforceable obligation to pay the supplier.
The definition of the term 'debt' is subject to modification by subsection 245-15(3) of Schedule 2C to the ITAA 1936, which specifies that:
An amount that, apart from this subsection, would be an enforceable obligation referred to in subsection (1) is not to be regarded as a debt if the amount has been, or will be, included in the assessable income of any year of income of the person on whom the obligation is imposed.
The 'amount' referred to in subsection 245-15(3) is the amount owed by the debtor that constitutes an enforceable obligation for the purposes of subsection 245-15(1) of the ITAA 1936.
Whilst the business returned an amount as assessable income in respect of the sale of the trading stock it acquired, that assessable income is not relevant for the purposes of considering subsection 245-15(3) of Schedule 2C to the ITAA 1936 as it is the debt itself that must constitute assessable income in order for that subsection to apply.
Date of decision: 14 November 2002Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1936
Schedule 2C
section 245-10
subsection 245-15(1)
subsection 245-15(3)
ATO ID 2003/27
ATO ID 2003/69
ATO ID 2003/41
Keywords
Debt forgiveness
Debt waivers
ISSN: 1445-2782
| Date: | Version: | |
| 14 November 2002 | Original statement | |
| You are here | 5 April 2012 | Archived |