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Edited version of your written advice

Authorisation Number: 1051445988713

Date of advice: 25 October 2018

Ruling

Subject: Income tax – commercial debt forgiveness

Question 1

Did each assignment of the promissory notes constitute the forgiveness of a debt under Division 245 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question

If yes to Question 1, did each assignment of the promissory notes result in a net forgiven amount under Division 245 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 31 December 2016

The scheme commences in:

Year beginning 1 January 2016

Relevant facts and circumstances

HeadCo is the head company of a consolidated group. HeadCo undertook a reorganisation.

The reorganisation involved a number of transactions and these included the following:

AustCo did not make a loss from the promissory notes by reference to, or by reason of, the interest on the promissory notes for the duration the promissory notes subsist.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 245

Income Tax Assessment Act 1997 section 245-10

Income Tax Assessment Act 1997 section 245-20

Income Tax Assessment Act 1997 section 245-36

Income Tax Assessment Act 1997 Subdivision 245-C

Income Tax Assessment Act 1997 section 245-55

Income Tax Assessment Act 1997 section 245-65

Income Tax Assessment Act 1997 section 245-75

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

All legislative references are to the ITAA 1997 unless indicated otherwise.

Question 1

Did each assignment of the promissory notes constitute the forgiveness of a debt under Division 245 of the ITAA 1997?

Summary

Each assignment of the promissory notes constituted the forgiveness of a debt under Division 245.

Detailed reasoning

Division 245 applies to any commercial debt (or part of a commercial debt) that is forgiven.

For the commercial debt forgiveness rules to apply there must be a forgiveness of a commercial debt. The term ‘debt’ is not defined so the ordinary meaning of ‘debt’ applies to Division 245. The Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010 states that the ordinary meaning of “debt” requires an obligation to do something which is enforceable.

Debts which are subject to Division 245 include debts:

The promissory notes were issued by AustCo to ForeignCo to satisfy its obligation to pay for the ABC Co shares.

Having regard to the terms of the promissory notes, the interest on these promissory notes can be deducted or could have been deducted (apart from the operation of any provision of the taxation Act other than paragraphs 8-1(2)(a), (b) or (c) that has the effect of preventing a deduction (subsection 245-10(c)). Accordingly, the promissory notes are ‘commercial debts’ for the purposes of Division 245.

For each assignment of the promissory notes, to constitute the forgiveness of a debt under Division 245, the following conditions outlined in section 245-36 must be met:

The parties to the assignments are associates as defined in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936) and the assignment did not occur 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 ITAA 1936) are made or accepted.

Accordingly, each assignment constitutes the forgiveness of a commercial debt for the purposes of Division 245.

Question 2

Initial assignments of the promissory notes

In accordance with the rules set out in Subdivision 245-C, the value of a forgiven debt needs to be worked out. Subsection 245-55(1) provides the primary rule for working out the value of a debt:

On the facts provided:

Accordingly, whether or not the parties to the assignment were dealing with each other at arm’s length in connection with the initial assignment of the subsequently assigned promissory note, the value of the promissory note when it was subsequently assigned as worked out under subsection 245-61 was equal to the face value of the promissory note (plus accrued interest).

Amount offset

The next step is to determine if an amount is to be offset against the value of the debt under section 245-65. Since the debts in question had been forgiven by way of assignment pursuant to section 245-36, the relevant items in the table in subsection 245-65 are items 4 and 5.

Item 4 of the table in subsection 245-65(1) will apply unless item 5 applies. Item 4 states that the amount which is offset against the value of a debt is the sum of the market value of any consideration paid or given (or required to be paid or given) by the debtor, in respect of the assignment, and the amount or market value of any consideration paid or given by the new creditor in respect of the assignment.

Item 5 of the table in subsection 245-65(1) states that where the debt is assigned under section 245-36 and the debt is not a moneylending debt and the creditor and the new creditor were not dealing with each other at arm’s length in connection with the assignment, the amount which is offset against the value of a debt is the market value of the debt at the time of the assignment.

On the facts provided:

Accordingly, irrespective of which of items 4 or 5 of the table in subsection 245-65(1) applies, the amount offset against the value of the promissory notes was equal to the respective face value of the promissory notes (plus accrued interest).

Gross forgiven amount

The final step is to work out the gross forgiven amount.

On the basis section 245-65 applies:

Accordingly, having regard to subsection 245-75(2), the commercial debt forgiveness provisions do not apply to each assignment of the promissory notes because the value of each of the forgiven debts (worked out under subsection 245-55(1) or section 245-61 as the case may be) is equal to the amount of offset to be applied. As a result, there is no gross forgiven amount. It follows that there is no net forgiven amount and Subdivisions 245-D to 245-F (about how to work out the net forgiven amount of a debt and how to treat it) do not apply.


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