ATO Interpretative Decision
ATO ID 2004/518 (Withdrawn)
Income Tax
Commercial debt forgiveness: gross forgiven amountFOI status: may be released
-
This ATO ID is withdrawn and has been replaced by ATO ID 2014/33 Commercial debt forgiveness: gross forgiven amount.This document incorporates revisions made since original publication.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Where a creditor forgives a commercial debt and pays the debtor an additional amount that constitutes assessable income of the debtor, does that amount, reduce the gross forgiven amount of the debt, under paragraph 245-85(1)(a) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. Paragraph 245-85(1)(a) of Schedule 2C to the ITAA 1936 only contemplates situations where an amount of the forgiven debt itself, rather than associated payments by the creditor, constitutes assessable income of the debtor.
Facts
Debtor incurred a commercial debt as defined in section 245-25 of Schedule 2C to the ITAA 1936 as part of an overall arrangement with Creditor concerning a primary production business ('the business') that was organised by Creditor.
As the business was not as profitable as Creditor had led Debtor to believe, Debtor threatened to sue Creditor for misrepresentation. That dispute was resolved by formal agreement ('the agreement') between the parties after 27 June 1996.
Pursuant to the agreement Creditor forgave Debtor the balance of the debt that was outstanding at the time of the agreement. The forgiven amount of the debt did not constitute assessable income of Debtor. Furthermore, Creditor paid Debtor a sum of money, as part of the settlement, which constituted assessable income to Debtor.
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 occurred after 27 June 1996.
Paragraph 245-85(1)(a) of Schedule 2C to the ITAA 1936 provides that the gross forgiven amount of a debt is reduced by:
any amount that, under a provision of this Act other than this Division, has been, or will be, included in the debtor's assessable income of any year of income as a result of the forgiveness of the debt.
Schedule 2C to the ITAA 1936 is designed to rectify, to some extent, the common lack of symmetry between the tax situations of debtors and creditors where a commercial debt is forgiven. Whilst it is appropriate that creditors are entitled to capital (or revenue) losses in respect of any economic loss incurred in respect of the forgiven debt, generally debtors are not subject to commensurate capital (or revenue) gains for their associated economic gain flowing from the forgiveness.
Where all or part of a forgiven debt does in fact constitute assessable income of a debtor, paragraph 245-85(1)(a) of Schedule 2C to the ITAA 1936 operates to ensure that Schedule 2C to the ITAA 1936 is not inappropriately applied to that extent, as the desired symmetry already exists.
In the present circumstances Debtor is not being assessed on the amount of forgiven debt and therefore a symmetry does not exist between the tax positions of Debtor and Creditor in relation to the forgiveness.
The additional sum of money paid by Creditor to Debtor does not help to create the symmetry and it is therefore inappropriate to take that amount into account under paragraph 245-85(1)(a) of Schedule 2C to the ITAA 1936.
Date of decision: 15 June 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1936
Schedule 2C
section 245-10
paragraph 245-85(1)(a)
Keywords
Commercial debt
Commercial debt forgiveness
Debt forgiveness
Debt waivers
Gross forgiven amount
ISSN: 1445-2782
| Date: | Version: | |
| 15 June 2004 | Original statement | |
| You are here | 7 November 2014 | Archived |