ATO Interpretative Decision

ATO ID 2003/268

Income Tax

Commercial debt forgiveness: reduction in gross forgiven amount - calculating net forgiven amount
FOI status: may be released

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Issue

Where a 'commercial debt' is forgiven and an amount is included in the debtor's assessable income as a result of the forgiveness of the debt, is the gross forgiven amount of the debt reduced for the purposes of section 245-85 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes. Paragraph 245-85(1)(a) of Schedule 2C to the ITAA 1936 reduces the gross forgiven amount by the amount included in the debtor's assessable income for the purpose of calculating the net forgiven amount.

Facts

The debtor is a relative of the principal shareholder in a private company.

The debtor entered into a loan agreement, on arm's length terms, with the company after 27 June 1996 for an amount of $16,500. The loan was for a period of 6 years and was used in the course of carrying on the debtor's retail business. The debtor had the capacity to pay the loan at the time it was provided.

On a later date, the company chose to forgive the full amount of the loan. The balance of the loan outstanding at the time the debt was forgiven was $13,247.

The gross forgiven amount of the debt was $13,247.

It was determined pursuant to Division 7A of the ITAA 1936 that the amount of debt forgiven was a dividend for the year of income in which the debt was forgiven.

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 commercial debt forgiveness provisions of Subdivision 245-D of Schedule C to the ITAA 1936 determine reductions to the gross forgiven amount of any debt forgiven for the purpose of ascertaining the net forgiven amount of the debt.

Paragraph 245-85(1)(a) of Schedule 2C to the ITAA 1936 reduces the gross forgiven amount by any amount (excluding amounts under Division 245 of the ITAA 1936) that has been or will be included in the debtor's assessable income as a result of the forgiveness of the debt.

As a result of the forgiveness of the debt, the debtor has an amount of $13,247 included in assessable income for the year of income in which the debt was forgiven pursuant to Division 7A of the ITAA 1936.

The gross forgiven amount of the debt, that is, $13,247, is reduced to nil. Accordingly, the net forgiven amount of the debt is also nil.

Date of decision: 15 January 2003

Year of income: Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C
   Division 245
   Subdivision 245-D
   section 245-85
   paragraph 245-85(1)(a)

Keywords
Dealings & transactions
Debt forgiveness
Debt related transactions
Debt waivers

Business Line: Losses and CGT Centre of Expertise

Date of publication: 29 April 2003

ISSN: 1445-2782

history

	Date:	Version:
You are here	15 January 2003	Original statement
	21 November 2008	Archived

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