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Edited version of your written advice
Authorisation Number: 1051176246484
Date of advice: 21 December 2016
Ruling
Subject: The application of CGT event C2 and the commercial debt forgiveness rules to the proposed forgiveness of a debt
Question 1
Can the Commissioner confirm that the market substitution rules in section 116-30 of the Income Tax Assessment Act 1997 ('ITAA 1997') apply to the CGT event C2 arising on the forgiveness of the debt owed by Trust D, with the result that Trust C is deemed to have received consideration equal to the face value of the debt when it is forgiven and no gain or no loss arises to Trust C on this CGT event?
Answer
Yes
Question 2
Can the Commissioner confirm that the debt in question qualifies as a 'commercial debt' under section 245-10 of the ITAA 1997?
Answer
Yes
Question 3
Can the Commissioner confirm that Subdivisions 245-C to 245-G of the ITAA 1997 do not apply to this proposed debt forgiveness, on the basis that the debt is forgiven for reasons of natural love and affection?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
Background
● Trust C is an Australian resident trust.
● C is the Appointor and Guardian of Trust C, and through that role ultimately controls the trust.
● Trust D is an Australian resident trust.
● D is the Appointor and Guardian of Trust D, and through that role ultimately controls the trust.
● D is the son of C.
● The beneficiaries of Trust D are all family members of D and therefore also related to C.
● Trust C loaned money to Trust D.
● Trust D is solvent and has sufficient assets to meet its liabilities, including this debt.
Proposed transaction
● Trust C will forgive Trust D's debt. The directors of the corporate trustee of Trust C will be motivated by the natural love and affection of the ultimate controller of Trust C (C) for the ultimate controller of Trust D (D).
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 116-30,
Income Tax Assessment Act 1997 - Section 245-10,
Income Tax Assessment Act 1997 - Section 245-40(e)
Reasons for decision
All legislative references are to the Income Tax Assessment Act 1997 (Cth) ('ITAA97') unless otherwise specified.
CGT event C2 (question 1)
The forgiveness of the Trust D's debt by Trust C affects the cessation of a CGT asset, being the debt. Therefore CGT event C2 occurs for Trust C. A capital gain would arise if the capital proceeds from the event exceed the cost base.
The cost base of the debt is the amount advanced. This is also the reduced cost base.
The actual capital proceeds are nil. However, section 116-30(1) provides that, where no proceeds are received, the taxpayer is deemed to have received capital proceeds equal to the market value of the asset. Given that Trust D is solvent and could have repaid the debt, the market value of the debt is the amount repayable, which equals the amount advanced.
Therefore the capital proceeds, cost base and reduced cost base of the asset are equal, and so no capital gain or loss arises.
Commercial debt (question 2)
A commercial debt, for the purposes of the commercial debt forgiveness rules in Division 245, includes a debt where the interest charged on the debt (had interest been charged) would be deductible to the debtor (paragraph 245-10(b)).
Trust D has used the amounts borrowed from Trust C to lend to other entities to derive interest income for itself. Therefore, if Trust C had charged interest, it would have been deductible by Trust D under section 8-1.
Therefore the debt in question is a commercial debt to which Division 245 applies.
Natural love and affection (question 3)
The forgiveness of a commercial debt has no consequences under Division 245 if the forgiveness is for reasons of natural love and affection (paragraph 245-40(e)).
Forgiveness can be for reasons of natural love and affection even if the creditor is not a natural person (ATO ID 2003/589 Income Tax: Commercial debt forgiveness - can a company forgive a debt for reasons of natural love and affection?). What matters is that the person(s) involved in making the decision to forgive the debt are motivated by natural love and affection towards the person(s) who benefit from the forgiveness.
In this case, the directors of the corporate trustee of the creditor will be motivated by natural and love and affection towards D and the other beneficiaries of Trust D who will benefit from the forgiveness. Therefore paragraph 245-40(e) applies and removes the forgiveness from the scope of the commercial debt forgiveness rules.
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