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Edited version of your private ruling
Authorisation Number: 1012486528936
Ruling
Subject: Assessable income
Question
Is a debt written off by the ATO deemed to be taxable income?
Answer: No
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
The entity is a company.
The ATO credited your integrated client account for hardship reasons.
The ATO may take action to collect this debt in the future.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 245-25
The commercial debt provisions are contained in Schedule 2C of the Income Tax Assessment Act 1936 (ITAA 1936).
What constitutes a commercial debt is explained in section 245-25 of Schedule 2C. Subsection 245-25(2) of the ITAA 1936 provides that:
Subject to subsection (4A), 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:
(a) is or would be allowable as a deduction to the debtor; or
(b) would be so allowable apart from the operation of an exception provision.
Subsection 245-25(4A) of the ITAA 1936 provides that:
A debt owed to the Commonwealth that arose under a law relating to taxation is not a commercial debt.
A decision by the Commissioner not to pursue a debt does not absolve the debtor from ever having to pay the liability except if the amount was not pursued because it was irrecoverable at law. A debt that was not pursued due to it being uneconomical to pursue may be re-raised and action to collect the debt can recommence, if the circumstances which led to the decision not to pursue the debt change, for example, the financial position of the debtor improves.
In this case, the debt is not a Commercial debt and may be collected in future and the written off amount is not classified as assessable income.
Furthermore, as a tax debt would not be allowed as a deduction, it is not included in assessable income.