ATO Interpretative Decision

ATO ID 2003/575

Income Tax

Commercial debt forgiveness - agreement to end debt obligation from a future time
FOI status: may be released

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 pursuant to an agreement a debtor is released from an obligation to pay a debt with effect from a future time in return for the debtor making future payments that are not nominal or insignificant, is the debt taken to be forgiven at the time of entering into the agreement for the purposes of subsection 245-35(1) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

No. As the debt has not been released, waived or otherwise extinguished at the time of the relevant agreement it is not taken for the purposes of applying Schedule 2C to the ITAA 1936 to be forgiven at that time.

Facts

After 27 June 1996 Creditor agreed to release Debtor from its obligations to pay the relevant debt in consideration of future payments that were not nominal or insignificant.

The debt was a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936.

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.

Whilst the debt maybe forgiven upon Debtor making the agreed payments, the entering into of the relevant agreement itself does not result in the debt being immediately forgiven for the purposes of subsection 245-35(1) of Schedule 2C to the ITAA 1936 as the agreed forgiveness is subject to conditions precedent being the making of the agreed payments.

Subsection 245-35(3) of Schedule 2C to the ITAA 1936 does not apply because the debtor's obligations under the agreement are neither nominal nor insignificant.

Date of decision: 6 June 2003

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, subsection 245-35(3)

Keywords
Debt forgiveness

Business Line: Losses and CGT Centre of Expertise

Date of publication: 11 July 2003

ISSN: 1445-2782

history

	Date:	Version:
You are here	6 June 2003	Original statement
	21 November 2008	Archived

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