ATO Interpretative Decision

ATO ID 2003/571

Income Tax

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

Issue

Where changes in foreign exchange rates commensurately increase the amount deductible to a debtor in respect of a commercial debt will this cause the calculation of the first and second applicable amounts under section 245-55 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) to differ?

Decision

No. The first and second applicable amounts under section 245-55 of Schedule 2C to the ITAA 1936 of a commercial debt are the same, as any changes in market variables such as foreign exchange rate fluctuations, are also taken into account in calculating the second applicable amount under paragraph 245-55(3)(b) of Schedule 2C.

Facts

Debtor incurred a commercial debt as defined in section 245-25 of Schedule 2C to the ITAA 1936 with Creditor.

The debt was in a foreign currency.

The notional value of the debt is to be calculated under section 245-55 of Schedule 2C to the ITAA 1936 as sections 245-60 and 245-61 of Schedule 2C do not apply.

After 27 June 1996 the debt was forgiven by Creditor under section 245-35 of Schedule 2C to the ITAA 1936.

During the time between when the debt was incurred and when it was forgiven the Australian dollar equivalent value of the debt changed because of fluctuations in exchange rates between the Australian dollar and the foreign currency.

The amount of those fluctuations was deductible to the Debtor.

No other changes in market variables affected the 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 occurred after 27 June 1996.

The notional value of a debt is calculated under section 245-55 of Schedule 2C to the ITAA 1936 where sections 245-60 and 245-61 of Schedule 2C do not apply.

Subsection 245-55(1) of Schedule 2C to the ITAA 1936 provides that the notional value of a debt is the lesser of the 'first applicable amount' calculated under subsection 245-55(2) of Schedule 2C and the 'second applicable amount' under subsection 245-55(3) of Schedule 2C.

Sub-paragraph 245-55(3)(a)(iii) of Schedule 2C to the ITAA 1936 provides that the second applicable amount includes an amount that is to be calculated as if no changes in market variables had occurred between the time when the debt was incurred and the time when the debt was forgiven.

In addition paragraph 245-55(3)(b) of Schedule 2C provides that the second applicable amount also includes the sum of the amount(s) of any deductions that have been allowed or are allowable to the Debtor as a result of the forgiveness that are attributable to changes in market variables that occurred between the time when the debt was incurred and its forgiveness.

Subsection 245-55(5) of Schedule 2C to the ITAA defines 'market variables' in relation to a debt as including changes in the rates of exchange between currencies, that effect the value of the debt.

As the relevant changes in market variables are fully taken into account under paragraph 245-55(3)(b) of Schedule 2C to the ITAA 1936 the first applicable amount and second applicable amount are the same in this instance.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C, section 245-10
   Schedule 2C, section 245-25
   Schedule 2C, section 245-35
   Schedule 2C, section 245-55
   Schedule 2C, subsection 245-55(1)
   Schedule 2C, subsection 245-55(2)
   Schedule 2C, subsection 245-55(3)
   Schedule 2C, sub-paragraph 245-55(3)(a)(iii)
   Schedule 2C, paragraph 245-55(3)(b)
   Schedule 2C, subsection 245-55(5)
   Schedule 2C, section 245-60
   Schedule 2C, section 245-61

Keywords
Debt forgiveness
Debt waivers

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  11 July 2003

ISSN: 1445-2782