ATO Interpretative Decision

ATO ID 2003/1020

Income Tax

Exception Provision: commercial debt forgiveness
FOI status: may be released

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 section 26-26 of the Income Tax Assessment Act 1997 (ITAA 1997) an 'exception provision' for the purposes of subsection 245-25(5) of Division 245, Schedule 2C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. Section 26-26 of the ITAA 1997 is an exception provision for the purposes of subsection 245-25(5) of Division 245, Schedule 2C to the ITAA 1936.

Facts

An entity has issued an instrument which is a non-share equity interest for the purposes of Division 974 of the ITAA 1997. A non-share distribution has been made in respect of that interest.

Reasons for Decision

Subsection 26-26(1) of the ITAA 1997 denies a deduction for a non-share distribution or a return that has accrued on a non-share equity interest.

A non-share equity interest in a company is defined under subsection 995-1(1) of the ITAA 1997 as 'an equity interest in the company that is not solely a share'. The meaning of a non-share equity interest thus includes an interest that is debt in legal form but is classified as an equity interest pursuant to Division 974 of the ITAA 1997.

An exception provision is defined under subsection 245-25(5) of Schedule 2C to the ITAA 1936 as a provision that has the effect of preventing a deduction that would otherwise be allowable, but it does not include paragraphs 8-1(2)(a), 8-1(2)(b) and 8-1(2)(c) of the ITAA 1997.

Section 26-26 of the ITAA 1997 is an exception provision under subsection 245-25(5) of Schedule 2C to the ITAA 1936.

A distribution made in relation to a non-share equity interest under Division 974 of the ITAA 1997 would, but for section 26-26 of the ITAA 1997, ordinarily be deductible to the issuer under section 8-1 of the ITAA 1997. Section 26-26 of the ITAA 1997 operates to deny this deduction.

Date of decision: 6 November 2003

Year of income: Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
Schedule 2C section 245-25
Schedule 2C subsection 245-25(5)

Income Tax Assessment Act 1997
   section 8-1
   paragraph 8-1(2)(a)
   paragraph 8-1(2)(b)
   paragraph 8-1(2)(c)
   section 26-26

Related ATO Interpretative Decisions
ATO ID 2002/1115

Keywords
Commercial debt
Commercial debt forgiveness
Non-share equity interest
Debt equity borderline

Siebel/TDMS Reference Number: 3744938

Business Line: Public Groups and International

Date of publication: 14 November 2003

ISSN: 1445-2782

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