Edited version of your written advice

Authorisation Number: 1013091212597

Date of advice: 15 September 2016

Ruling

Subject: Commercial Debt Forgiveness

Question 1

Has a debt owed by the Taxpayer been forgiven in accordance with section 245-36 of the ITAA 1997 of the Commercial Debt Forgiveness rules?

Answer

No

This ruling applies for the following periods:

1 February 2016 to 31 January 2017

The scheme commenced on:

22 February 2016

Relevant facts and circumstances

The Taxpayer is an Australian unlisted public company that runs a business.

The shares in the Taxpayer were held by three entities "the Vendor".

The Vendor entered into an agreement to sell their shares in the Taxpayer to another entity "the Purchaser".

The Vendor and the Purchaser are independent third parties who were acting at arm's length in connection with the transaction.

The Taxpayer and the Purchaser are independent third parties who were acting at arm's length in connection with the transaction.

The shares disposed of were ordinary shares and were the only shares which provided the rights to vote and receive distributions of income and capital on winding up.

In addition to the sale of the shares, the contract provided that loans historically made by the Vendor to the Taxpayer, during their period of ownership, would be assigned both legally and equitably to the Purchaser.

The loans made by the Vendor to the Taxpayer were interest bearing loans and since initial grant, a number of repayments had been made.

The loans funds were used by the Taxpayer for business purposes; the monies were not used for non-business or private purposes.

The Vendor is not and was not in the business of money lending.

The loans are carried at existing book value in the accounts of the Purchaser following the sale of the shares to the Purchaser, and the Deeds of Assignment require transfer of ownership of the whole of the debt i.e. no portion of the loans were written off as a result of the assignment to the Purchaser.

You have advised the Taxpayer has been solvent throughout its period of trade, including at the time the debt was incurred and when it was assigned.

For completeness, the debt is not a non-recourse debt.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 318

Income Tax assessment Act 1997 Division 245

Income Tax Assessment Act 1997 section 245-10

Income Tax Assessment Act 1997 section 245-35

Income Tax Assessment Act 1997 section 245-36

Reasons for decision

Division 245 of ITAA 1997 contains special rules to remove the tax benefit obtained by a taxpayer when the whole or part of a commercial debt owed by the taxpayer is forgiven. Division 245 of the ITAA 1997 applies when a commercial debt is forgiven by a creditor and the resulting gain is not included in the debtor's assessable income.

Division 245 was rewritten into ITAA 1997 commencing 1 July 2010. It applies to debts forgiven from the 2010-11 income year onwards.

The definition of a commercial debt is set out in section 245-10 of the ITAA 1997:

Subdivisions 245-C to 245-G apply to a debt of yours if:

(a) the whole or any part of interest, or of an amount in the nature of interest, paid or payable by you in respect of the debt has been deducted, or can be deducted, by you; or

(b) interest, or an amount in the nature of interest, is not payable by you in respect of the debt but, had interest or such an amount been payable, the whole or any part of the interest or amount could have been deducted by you; or

(c) interest or an amount mentioned in paragraph (a) or (b) could have been deducted by you apart from the operation of a provision of this Act (other than paragraphs 8-1(2)(a), (b) and (c)) that has the effect of preventing a deduction.

Note: Paragraphs 8-1(2)(a), (b) and (c) prevent deductions for capital, private or domestic outgoings and for outgoings relating to exempt income or non-assessable non-exempt income.

You have advised the loans made to the Taxpayer by the Vendor, comply with the definition of commercial debts, as they were interest bearing loans which were incurred and expended for business purposes; specifically, being the management and operation of the business.

Section 245-35 of the ITAA 1997 outlines what constitutes forgiveness of a debt:

A debt is forgiven if and when:

(a) the debtor's obligation to pay the debt is released or waived, or is otherwise extinguished other than by repaying the debt in full; or

(b) the period within which the creditor is entitled to sue for the recovery of the debt ends, because of the operation of a statute of limitations, without the debt having been paid.

You have advised that neither subsection 245-35(a) nor (b) of the ITAA 1997 apply to the Taxpayer, as the obligation to pay the debt has not been released or waived or extinguished, nor has the period within which the creditor is entitled to sue ended because of the operation of the statute of limitations.

Section 245-36 of the ITAA 1997 outlines the conditions which must be met for forgiveness of debt to occur through assignment of debt:

A debt is forgiven if and when the creditor assigns the right to receive payment of the debt to another entity (the new creditor) and the following conditions are met:

(a) either the new creditor is the debtor's *associate or the assignment occurred under an *arrangement to which the new creditor and debtor were parties;

(b) the right to receive payment of the debt was not acquired by the new creditor in the ordinary course of *trading on a market, exchange or other place on which, or facility by means of which, offers to sell, buy or exchange securities (within the meaning of Division 16E of Part III of the Income Tax Assessment Act 1936) are made or accepted.

Section 318 of the Income Tax Act 1936 (ITAA 1936) outlines the definition of an associate. Section 318(2) sets out the circumstances where and entity is the associate of a company. These circumstances must be considered when determining the relationship between the Taxpayer and the new creditor, the Purchaser.

You advised with regard to section 318(2)(a) and (b) of the ITAA 1936, the Purchaser was not a partner of the Taxpayer, nor was it in a partnership in which the Taxpayer is a partner at the time of the assignment.

You advised with regard to section 318(2)(c)of the ITAA1936 the Purchaser was not a trustee of a trust under which the Taxpayer, or an associate of the Taxpayer, benefitted at the time of the assignment.

You advised that at the time of the assignment of the debt, the Purchaser held no interest in the voting rights or the rights to dividends or the capital of the Taxpayer and therefore you consider that neither the Taxpayer nor the Purchaser, not any associate with either, could be said to sufficiently influence the other, as per section 318(6)(b) and paragraphs 318(2)(d)(i) and 318(2)(e)(i) if the ITAA 1936.

You advised that at the time of the assignment, the Purchaser did not hold a majority voting interest in the Taxpayer, either alone or in conjunction with another associated entity. The Purchaser possessed no interest in the Taxpayer and as a result could not cast any votes. The Taxpayer did not hold a majority voting interest in the Purchaser at the time of the assignment.

You advised that the assignment of the debt occurred concurrently with the assignment of the shares; one did not and could not have occurred before the other.

Based on the facts provided the Commissioner is satisfied the Taxpayer and the Purchaser were unconnected parties and acted at arm's length in respect of the transaction. The Commissioner is satisfied that at the time of the assignment there was no relationship or association between the Taxpayer and the Purchaser.

With regard to the second part of section 245-36(a) of the ITAA 1997:

'…or the assignment occurred under an arrangement to which the new creditor and debtor were parties…'

The Vendor assigned the debt, being the relevant amounts owed by the Taxpayer to the Purchaser.

You advised both a legal and equitable assignment of the debt owed by the Taxpayer, by the Vendor to the Purchaser, which is reflected in the Sale Agreement and Deeds of Assignment relating to the loans.

You advised whilst the Taxpayer was the subject of the assignment, it did not have any authority to make decisions in respect of the terms or details comprising the assignment.

You advised the Taxpayer did not have the capacity or scope to determine whether or not the debt would be assigned, or to whom it would be assigned.

The Commissioner accepts that the Purchaser and the Taxpayer (the debtor), were not parties to an arrangement under which the debt was transferred. The parties to the Deeds of Assignment were the Vendor and the Purchaser.

For completeness, with respect to section 245-36(b) of the ITAA 1997 you advised that the debt was assigned as part of the sale of ownership of the Taxpayer by the Vendor and therefore consider the debt was not acquired by the Purchaser in the ordinary course of trading on a market, exchange or other place which, or facility by means of which, offers to sell, buy or exchange securities are made or accepted.

Conclusion

Both section 245-36(a) and (b) need to be applicable in order for section 245-36 of the ITAA 1997 to have effect. As section 245-36(a) of the ITAA 1997 has not been met with regard to the assignment of debt by the Vendor to the Purchaser there is no commercial debt forgiveness with regard to the transaction pursuant to section 245-36 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

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).