ATO Interpretative Decision

ATO ID 2003/275 (Withdrawn)

Income Tax

Commercial debt forgiveness: determining net forgiven amount - agreements between commonly owned companies
FOI status: may be released

This ATO ID is withdrawn from the database as it is a simple restatement of the law and does not contain an interpretative decision.

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

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Where a 'commercial debt' is forgiven and the debtor and creditor are companies under common ownership throughout the term of the debt, can the debtor and creditor enter into an agreement for the creditor to forgo an amount of capital loss or revenue deduction that does not exceed the 'provisional net forgiven amount' of the debt?

Decision

Yes. The debtor and creditor can enter into such an agreement pursuant to section 245-90 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

A company entered into an arm's length loan with another company for an amount of $16,500. The loan constituted a commercial debt.

Subsequently, after 27 June 1996, the creditor chose to forgive the balance of the loan payable, being $9,100, as the debtor was experiencing severe financial difficulties and was unable to repay the amount outstanding.

The gross forgiven amount of the debt was $9,100.

Throughout the term of the debt the debtor and creditor were under common ownership.

The creditor would have incurred a capital loss of $9,100 as a result of the forgiveness of the debt, apart from section 245-90 of Schedule 2C of the ITAA 1936. The provisional net forgiven amount of the debt, determined after applying section 245-85 of Schedule 2C to the ITAA 1936, was also $9100.

The public officer of the debtor and public officer of the creditor signed a written agreement before lodgment of either company's income tax return for the forgiveness year of income, whereby the creditor agreed to forgo $6,000 of its capital loss as a result of the forgiveness of the debt.

Reasons for Decision

The commercial debt forgiveness provisions of section 245-85 of Schedule 2C 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 or, where there is an agreement for the purposes of section 245-90 of Schedule 2C to the ITAA 1936, the provisional net forgiven amount of the debt (stated to be $9,100).

Section 245-90 of Schedule 2C to the ITAA 1936 applies if a debt owed by a company to another company is forgiven and throughout the term of the debt the companies were under common ownership.

Subsection 245-90(2) of Schedule 2C to the ITAA 1936 provides that, if apart from this subsection, the creditor would have incurred a capital loss as a result of the forgiveness of the debt, the debtor and creditor may agree that the creditor is to forgo so much of the loss as is stated and does not exceed the provisional net forgiven amount of the debt. The creditor would have incurred a capital loss of $9,100 which is also the provisional net forgiven amount.

The agreement between the debtor and creditor is a valid agreement pursuant to subsection 245-90(4) of Schedule 2C to the ITAA 1936.

The effect of the agreement is to reduce the capital loss of the creditor to $3,100. A further effect of the agreement is to reduce the provisional net forgiven amount of the debt by $6,000, resulting in a net forgiven amount of $3,100, pursuant to subparagraph 245-90(2)(b)(iii) of Schedule 2C to the ITAA 1936.

Date of decision: 17 January 2003

Year of income: Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C
   section 245-85
   section 245-90
   subsection 245-90(2)
   subparagraph 245-90(2)(b)(iii)
   subsection 245-90(4)

Keywords
Debt forgiveness
Debt related transactions
Debt waivers

Business Line: Losses and CGT Centre of Expertise

Date of publication: 16 May 2003

ISSN: 1445-2782

history

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

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