ATO Interpretative Decision

ATO ID 2003/1140

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the definition of non-equity share interest in Subdivision 974-C of the Income Tax Assessment Act 1997 (ITAA 1997), modify the definition of a commercial debt for the purposes of section 245-25 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

No. Schedule 2C to the ITAA 1936 does not expressly refer to that definition of non-equity share interest and therefore it has no application to Schedule 2C.

Facts

Debtor legally owed a debt to Creditor that constituted a non-share equity interest as defined in Subdivision 974-C of the ITAA 1997.

Interest paid by Debtor to Creditor in respect of the debt was deductible to Debtor.

After the 1st of July 2001 Creditor formally forgave the relevant debt.

Reasons for Decision

Section 245-10 of Schedule 2C to the ITAA 1936 provides that Division 245 of the ITAA 1936 applies to the forgiveness of a commercial debt after 27 June 1996.

The amount owed by Debtor to Creditor satisfies the definition of 'debt' in section 245-15 of Schedule 2C to the ITAA 1936:

'Subject to this section, a debt is an enforceable obligation imposed by law on a person to pay an amount to another person.'

Division 974 of the ITAA 1997 does not operate to modify that definition to preclude a non-share equity interest constituting such a debt.

The term 'non-share equity interest' that applies to the relevant debt is defined in subsection 6(1) of the ITAA 1936 as:

'Has the same meaning as in the Income Tax Assessment Act 1997.'

Subsection 995-1(1) of the ITAA 1997 defines a non-share equity interest as:

'In a company means an *equity interest in the company that is not a *share.'

Subsection 995-1(1) of the ITAA 1997 defines *equity interest:

'In a company has the meaning given by Subdivision 974-C.'

In the present instance it is a fact that the relevant debt constitutes an *equity interest by Creditor in Debtor for the purposes of Subdivision 974-C of the ITAA 1997.

As explained in subsection 974-10(1) of the ITAA 1997 the definitions of *debt interest and *equity interest contained in Division 974 of the ITAA 1997 are only to be used for 'particular tax purposes'

Paragraph 974-105(2)(b) of the ITAA 1997 provides that those definitions have application to:

'(b) any other provision of this Act whose operation depends on an expression whose meaning is given by this Division.'

Schedule 2C to the ITAA 1936 does not refer to the defined terms *debt interest or *equity interest and therefore those defined terms do not effect Schedule 2C, with one exception which is not relevant for present purposes.

That is, subsection 245-25(4) of Schedule 2C to the ITAA 1936 expressly provides that a 'non-equity share in a company is taken to be a commercial debt owed by the company to the shareholder' in applying Schedule 2C.

Subsection 245-25(2) of Schedule 2C to the ITAA 1936 provides that a debt is a commercial debt if the whole or any part of the interest paid or payable in respect of the debt is or would be allowable as a deduction to the debtor. That condition is satisfied here as interest in relation to the debt is deductible to Debtor.

Accordingly, the debt owed by Debtor to creditor constitutes a commercial debt as defined in section 245-25 of Schedule 2C to the ITAA 1936.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C
   Division 245
   section 245-10
   section 245-15
   section 245-25
   subsection 245-25(2)
   subsection 245-25(4)

Keywords
Debt forgiveness
Debt waivers

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  19 December 2003

ISSN: 1445-2782