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Ruling
Subject: debt forgiveness
Question
Will paragraph 245-40(e) of the Income Tax Assessment Act 1997 (ITAA) operate to exempt the forgiveness of a commercial debt owed by you to a beneficiary from the commercial debt forgiveness provisions contained in Subdivisions 245-C to 245-G of the ITAA 1997?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Relevant facts and circumstances
You are a discretionary trust, which earns investment income, including interest and dividends. Currently, you have one beneficiary however it is possible there be other beneficiaries, including children, grandchildren, parents, grandparents, siblings and other relatives. Eligible trusts or corporations may also be beneficiaries of the trust. All beneficiaries may receive distributions of income or capital.
As at 30 June 2011, you owed a borrowing to a beneficiary. If interest were to be charged on this loan, you would be entitled to a deduction.
That beneficiary is considering electing to forgive the debt owed to him by you in recognition of the natural love and affection that he has for the other beneficiaries of the trust.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 245-10
Income Tax Assessment Act 1997 Section 245-40
Reasons for decision
Forgiveness of commercial debts
Division 245 of the ITAA 1997 is about forgiveness of commercial debts.
Section 245-10 of the ITAA 1997 provides a debt is a commercial debt if the whole or any part of interest, or of an amount in the nature of interest, paid or payable in respect of the debt is or would be allowable as a deduction to the debtor.
The operative rules for Division 245 of the ITAA 1997 are contained in Subdivisions 245-C to 245-G.
In summary, these operative rules provide, when a creditor forgives a commercial debt you (the debtor) owe, the forgiven amount is offset against amounts that could otherwise reduce your taxable income in the same or a later income year, namely:
(a) your tax losses and net capital losses; and
(b) capital allowances and some similar deductions; and
(c) the cost bases of your CGT assets
However, paragraph 245-40(e) of the ITAA 1997 provides that the operative rules in Subdivisions 245-C to 245-G do not apply to a forgiveness of a commercial debt if the forgiveness is for reasons of natural love and affection.
This paragraph does not specify that creditor or debtor must be a natural person. It only requires that the debt was 'forgiven for reasons of natural love and affection'.
In your case, paragraph 245-40(e) of the ITAA will operate to exempt the forgiveness of a commercial debt owed by you if your creditor forgives the debt for reasons of natural love and affection towards your beneficiaries.