Edited version of private advice

Authorisation Number: 1051810675556

Date of advice: 1 March 2021

Ruling

Subject: Commercial debt forgiveness - under common ownership

Question 1

Are Company B and Company A (the Taxpayers) 'under common ownership' as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. The Taxpayer's are 'under common ownership' as defined in section 995-1 of the ITAA 1997. The same shareholders (and the same ultimate individuals where the shareholder is a company) own the same proportions of shares in both Taxpayer's. The Taxpayers have been under common ownership since Company B's incorporation on 29 June 2015.

Question 2

Are the Taxpayers eligible to apply section 245-90 of the ITAA 1997 in relation to the proposed forgiveness of debt where the debt is actually forgiven?

Answer

Yes. Where the debt is forgiven, the Taxpayers are eligible to apply section 245-90 of the ITAA 1997 in relation to the forgiveness because:

i)              The debt owing from Company B to Company A will have been forgiven;

ii)             From the time when the debt was incurred until the time the debt was forgiven, Company B and Company A were under common ownership; and

iii)           Apart from the operation of section 245-90, Company A would have made a capital loss as a result of the forgiveness of the debt.

This ruling applies for the following period:

Year ending 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

Company A conducts a business of after-sales support and warranty services for corporate customers.

On XX Month XXXX the shareholders of Company A incorporated Company B as the holding entity for an income tax consolidated group to operate a new business providing aftermarket warranty services to individual customers.

Since the date of incorporation shareholders of Company A have owned shares in Company B in the same proportions as those held in Company A.

During the period XXXX to XXXX Company A has loaned various amounts to Company B to fund start-up and working capital requirements.

On XXXX Company A returned capital to its shareholders, proportionate to their ownership interest.

On XXXX a share split was executed by Company B. No capital contributions were made.

No other changes to shareholding has occurred during the loan period.

In tracing ownership of the shares in each company through to the individuals who ultimately hold them all shares are equity interests and no interest payments would be made in respect of these shares.

Given the common shareholdings between Company A and Company B it is proposed that the total debt owing by Company B to Company A of $X be forgiven in the XXXX income year for no consideration.

Company A and Company B will enter an agreement to forgo the whole or a part of the capital loss that it would otherwise have incurred as a result of forgiving the debt owed by Company B, both Company A's capital loss and Company B's provisional net forgiven amount will be reduced by the amount specified in the agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 245-90

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