ATO Interpretative Decision
ATO ID 2005/12
Income tax
Commercial Debt Forgiveness - interaction with Subdivision 165-CD of the Income Tax Assessment Act 1997 - no net forgiven amountFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does subsection 165-115ZA(2) of the Income Tax Assessment Act 1997 (ITAA 1997) still nullify the operation of section 165-115ZA in respect of a relevant debt interest, where the Loss Company does not have a net forgiven amount to be applied under Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936), if that debt interest is forgiven?
Decision
Yes. Subsection 165-115ZA(2) of the ITAA 1997 nullifies the operation of section 165-115ZA where section 245-10 in Schedule 2C to the ITAA 1936 applies, which is not dependent upon there being a net forgiven amount under subsection 245-85(2) of Schedule 2C.
Facts
Loss Company has an alteration time under section 165-115L of the ITAA 1997 on 1 January 2002.
In respect of that alteration time Loss Company has an overall loss under subsection 165-115R(5) of the ITAA 1997.
Creditor Company has a 'relevant debt interest' as defined in subsection 165-115Y(1) of the ITAA 1997 of $40,000 in Loss Company. That debt is a 'commercial debt', as defined in section 245-25 of Schedule 2C to the ITAA 1936, of Loss Company.
Creditor Company released Loss Company from that $40,000 debt on 6 June 2002 for no consideration.
Having regard to the business of Creditor Company, that debt is not a moneylending debt as defined in subsection 245-245(1) of Schedule 2C to the ITAA 1936.
The release of the debt constituted a forgiveness under section 245-35 of Schedule 2C to the ITAA 1936.
The market value of the debt at time of forgiveness was $40,000 as Loss Company was solvent at all relevant times.
Reasons for Decision
Subsection 165-115ZA(2) of the ITAA 1997 nullifies the application of section 165-115ZA to the ITAA 1997 that would otherwise require reductions to reduced cost base of relevant debt interest(s) where section 245-10 of Schedule 2C to the ITAA 1936 also applies at the same time or a later time.
Subsection 245-10(1) of Schedule 2C to the ITAA 1936 provides that subject to subsection (2) thereof, that Division 245 (Schedule 2C) of the ITAA 1936 applies to the forgiveness of a commercial debt.
In the present instance, Loss Company will have no net forgiven amount under subsection 245-85(2) of the ITAA 1936 in respect of the debt forgiveness, as Loss Company (as debtor) will be taken by subsection 245-65(2) of the ITAA 1936 to have paid consideration equal to the market value of the debt at the time of forgiveness.
The absence of a net forgiven amount does not mean that section 245-10 of Schedule 2C to the ITAA 1936 has not applied.
Accordingly, no reduction to the reduced cost base of the $40,000 relevant debt interest is required under Subdivision 165-CD of the ITAA 1997 because of subsection 165-115ZA(2) thereof.
Date of decision: 22 December 2004Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1936
Schedule 2C
section 245-10
subsection 245-10(1)
subsection 245-10(2)
section 245-25
section 245-35
subsection 245-65(2)
subsection 245-85(2)
subsection 245-245(1)
Subdivision 165-CD
section 165-115L
subsection 165-115R(5)
subsection 165-115Y(1)
section 165-115Z
subsection 165-115ZA(2) Related ATO Interpretative Decisions
ATO ID 2005/11
ATO ID 2005/13
Keywords
Commercial debt forgiveness
Debt interest
Net forgiven amount
ISSN: 1445-2782