ATO ID 2003/1020: Exception Provision: commercial debt forgiveness
Date of decision: 6 November 2003
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Is section 26-26 of the Income Tax Assessment Act 1997 (ITAA 1997) an 'exception provision' for the purposes of subsection 245-25(5) of Division 245, Schedule 2C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. Section 26-26 of the ITAA 1997 is an exception provision for the purposes of subsection 245-25(5) of Division 245, Schedule 2C to the ITAA 1936.

Facts
An entity has issued an instrument which is a non-share equity interest for the purposes of Division 974 of the ITAA 1997. A non-share distribution has been made in respect of that interest.

Reasons for decision
Summary: Subsection 26-26(1) of the ITAA 1997 denies a deduction for a non-share distribution or a return that has accrued on a non-share equity interest. A non-share equity interest in a company is defined under subsection 995-1(1) of the ITAA 1997 as 'an equity interest in the company that is not solely a share'. The meaning of a non-share equity interest thus includes an interest that is debt in legal form but is classified as an equity interest pursuant to Division 974 of the ITAA 1997. An exception provision is defined under subsection 245-25(5) of Schedule 2C to the ITAA 1936 as a provision that has the effect of preventing a deduction that would otherwise be allowable, but it does not include paragraphs 8-1(2)(a), 8-1(2)(b) and 8-1(2)(c) of the ITAA 1997. Section 26-26 of the ITAA 1997 is an exception provision under subsection 245-25(5) of Schedule 2C to the ITAA 1936. A distribution made in relation to a non-share equity interest under Division 974 of the ITAA 1997 would, but for section 26-26 of the ITAA 1997, ordinarily be deductible to the issuer under section 8-1 of the ITAA 1997. Section 26-26 of the ITAA 1997 operates to deny this deduction.

Legislative references: Income Tax Assessment Act 1936 Schedule 2C section 245-25 Schedule 2C subsection 245-25(5)
Related ATO interpretative decisions: ATO ID 2002/1115
Subject references: Commercial debt Commercial debt forgiveness Non-share equity interest Debt equity borderline