ATO Interpretative Decision

ATO ID 2003/496 (Withdrawn)

Income Tax

Commercial Debt Forgiveness - subscription for shares in a company to enable debt to be paid
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This ATO ID is withdrawn from the database as it is a simple restatement of the law and does not contain an interpretative decision.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.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Is a commercial debt forgiven under Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) where a creditor subscribes for shares in the debtor and the debtor applies part of the subscription money to make a payment towards discharge of the debt?

Decision

Yes. Subsection 245-35(5) of Schedule 2C to the ITAA 1936 provides that so much of the debt that is paid out of the subscription money is forgiven when the money is so applied.

Facts

After 27 June 1996 a creditor agreed to subscribe for shares in a debtor company in part to enable the debtor to discharge a commercial debt owed to the creditor.

Subsequently the debtor used part of the money subscribed by the creditor towards discharge of the commercial debt.

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.

Subsection 245-35(5) of Schedule 2C to the ITAA 1936 provides in respect of a commercial debt that where

'(a) a person subscribes for shares in a company to enable the company to make a payment in or towards discharge of a debt owed by it to the person; an

(b) the company applies all or any of the money subscribed in or towards payment of the debt;

then:

(c) so much of the debt as is paid out of the money so applied is taken to be forgiven; an

(d) the time of the forgiveness is taken to be the time when the money is so applied.'

Accordingly, so much of the commercial debt that was discharged with money subscribed by the creditor for the debtor's shares, is taken to be forgiven for the purposes of Schedule 2C to the ITAA 1936 on the date when the money was so applied

Date of decision: 24 April 2003

Year of income: Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
Schedule 2C, section 245-10
Schedule 2C, subsection 245-35(5)

Keywords
Debt forgiveness
Debt waiver

Business Line: Losses and CGT Centre of Expertise

Date of publication: 27 June 2003

ISSN: 1445-2782

history

	Date:	Version:
	24 April 2003	Original statement
You are here	21 November 2008	Archived

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).