ATO Interpretative Decision

ATO ID 2003/61 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database as it is a simple restatement of the law and does not contain an interpretative decision.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

Issue

Does section 245-10 of Schedule 2C of the Income Tax Assessment Act 1936 (ITAA 1936) have application to a 'commercial debt' forgiven after 27 June 1996 where that debt arose from a loan agreement executed before 28 June 1996?

Decision

Yes. Schedule 2C of the ITAA 1936 will apply in accordance with section 245-10 of the ITAA 1936.

Facts

A taxpayer incurred a debt under a written agreement made before 28 June 1996. The taxpayer paid several instalments on the debt, as provided in the agreement. As at 28 June 1996, there was a balance outstanding.

The agreement provided that the lender could only have recourse to any profits made by the taxpayer from applying the loan funds in an agreed business activity.

The agreed business activity never generated a profit for the taxpayer and accordingly no repayment was ever made by the taxpayer.

On 1 December 1997 the taxpayer and the lender executed a formal deed of release, whereby the taxpayer was permanently relieved of the obligation to repay the outstanding amount.

The lender proceeded to claim the amount outstanding as a capital loss in its Income Tax Return for the 1997-98 year of income.

Reasons for Decision

The application of Division 245 of Schedule 2C of the ITAA 1936 to the forgiveness of a commercial debt is dependent upon the operation of subsection 245-10(1) of Schedule 2C of the ITAA 1936:

Subject to subsection (2), this Division applies to a forgiveness of a commercial debt but so applies only if the forgiveness occurs after the commencement day.

The term 'commencement day' is defined in section 245-245 of Schedule 2C of the ITAA 1936 as "means the day on which this Schedule commences'.

Schedule 2C of the ITAA 1936 was inserted by Taxation Laws Amendment Act (No. 2) 1996 (Act No. 76 of 1996), with effect from 27 June 1996.

Subsection 245-10(1) of Schedule 2C of the ITAA 1936 is expressed as being subject to subsection (2) thereof:

This Division does not apply to a forgiveness referred to in subsection (1) if the forgiveness occurs in accordance with the terms of an agreement or arrangement that:

a)

was entered into on or before the commencement day; and

b)

is evidenced in writing otherwise than by a document evidencing the agreement or transaction under which the debt arose.

As the written agreement, that is, the deed that forgave the relevant commercial debt, was entered into on 1 December 1997 after the commencement of Schedule 2C of the ITAA 1936 effective from 27 June 1996, Division 245 of Schedule 2C of the ITAA 1936 applies to the forgiveness of the debt.

Year of income:  Year ended 30 June 1998

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C
   Division 245
   section 245-10
   subsection 245-10(1)
   subsection 245-10(2)

Keywords
Debt waivers
Debt forgiveness

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  15 March 2003

ISSN: 1445-2782