ATO ID 2004/570: Commercial debt forgiveness: notional value - debt becomes non-recourse
Date of decision: 5 July 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
For a forgiven debt to satisfy the definition of a non-recourse debt under subsection 245-60(1) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936), must it have been non-recourse at all times since the debt was incurred?

Decision
No. A forgiven debt satisfies that definition provided that at the time of forgiveness of the debt, the rights of the creditor were limited to all or any of the rights specified in paragraphs 245-60(1)(a),(b) or (c) of Schedule 2C to the ITAA 1936.

Facts
Debtor incurred a debt that was a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936. The relevant agreement between Creditor and Debtor provided that in the event of Debtor making certain payments over two years, the rights of Creditor in relation to the balance of the debt then outstanding would be limited in a way specified in subsection 245-60(1) of Schedule 2C to the ITAA 1936. Debtor made those requisite payments. After 27 June 1996 the (now) non-recourse balance of the debt was forgiven by Creditor such that subsection 245-35(1) of Schedule 2C to the ITAA 1936 applied.

Reasons for decision
Summary: Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C to the ITAA 1936 applies where the forgiveness of a commercial debt occurs after 27 June 1996. The notional value of a non-recourse debt is calculated under section 245-60 of Schedule 2C to the ITAA 1936. For subsection 245-60(2) of Schedule 2C to the ITAA 1936 to apply to calculate the notional value of a forgiven debt, the relevant debt must satisfy the definition of a 'non-recourse debt' in subsection 245-60(1) of Schedule 2C. In the present circumstances the debt could not possibly satisfy that definition until Debtor had made the requisite payments. The definition of a non-recourse debt in subsection 245-60(1) of Schedule 2C to the ITAA 1936 is based upon two concepts: In the absence of an explicit time in subsection 245-60(1) of Schedule 2C to the ITAA 1936, for determining whether a debt is a non-recourse debt, it is appropriate to make such a determination at the time of forgiveness of the debt, as the term is only of relevance in determining a notional value under subsection 245-60(2) of Schedule 2C upon forgiveness of the debt.

Legislative references: Income Tax Assessment Act 1936 Schedule 2C section 245-10 section 245-25 subsection 245-35(1) section 245-60 subsection 245-60(1) paragraph 245-60(1)(a) paragraph 245-60(1)(b) paragraph 245-60(1)(c) subsection 245-60(2)
Subject references: CDF notional value Debt forgiveness Debt waivers Non recourse loans