ATO ID 2004/377: Commercial debt forgiveness: commercial debt - non-share equity interest
Date of decision: 13 April 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Can an instrument which satisfies the definition of a 'non-share equity interest in a company' in Subdivision 974-C of the Income Tax Assessment Act 1997 (ITAA 1997), constitute a commercial debt for the purposes of section 245-25 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. A non-share equity interest can be a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936.

Facts
Debtor legally owed a debt to Creditor that constituted a non-share equity interest as defined in Subdivision 974-C of the ITAA 1997. Interest paid by Debtor to Creditor in respect of the debt would have been deductible to Debtor but for the operation of section 26-26 of the ITAA 1997. After the 1st of July 2001, Creditor formally forgave the relevant debt.

Reasons for decision
Summary: Section 245-10 of Schedule 2C to the ITAA 1936 provides that Division 245 of the ITAA 1936 applies to the forgiveness of a commercial debt if the forgiveness occurs after 27 June 1996. The amount owed by Debtor to Creditor satisfies the definition of 'debt' in subsection 245-15(1) of Schedule 2C to the ITAA 1936, which provides: Subject to this section, a debt is an enforceable obligation imposed by law on a person to pay an amount to another person. Division 974 of the ITAA 1997 does not operate to modify that definition so as to preclude a non-share equity interest constituting such a debt. Subsection 995-1(1) of the ITAA 1997 defines a 'non-share equity interest in a company' as meaning: an *equity interest in the company that is not solely a *share. * denotes a term defined in subsection 995-1(1) of the ITAA 1997 Subsection 995-1(1) of the ITAA 1997 defines 'equity interest in a company' as having the meaning given by Subdivision 974-C of the ITAA 1997. In the present instance, it is a fact that the relevant debt constitutes an equity interest by Creditor in Debtor for the purposes of Subdivision 974-C of the ITAA 1997. Subsection 974-10(1) of the ITAA 1997 provides that an object of Division 974 is to establish a test for determining whether a scheme gives rise to a debt or an equity interest for particular taxation purposes. Division 974 does not have application for the purposes of all taxation law. The definition of commercial debt in section 245-25 of Schedule 2C to the ITAA 1936 is not expressly made subject to the defined terms 'debt interest' or 'equity interest' used in Division 974 of the ITAA 1997. Therefore, a debt in legal form would nonetheless constitute 'debt' for the purposes of section 245-15 of Schedule 2C to the ITAA 1936, even if such debts were classified as 'non-share equity interests in a company' pursuant to Division 974 of the ITAA 1997. Subsection 245-25(2) of Schedule 2C to the ITAA 1936 provides that a debt is a commercial debt if the whole or any part of the interest paid or payable in respect of the debt is or would be allowable as a deduction to the debtor apart from the operation of an exception provision. Section 26-26 of the ITAA 1997 is an exception provision within the meaning of subsection 245-25(5) of Schedule 2C to the ITAA 1936. Accordingly, the debt owed by Debtor to Creditor constitutes a commercial debt as defined in section 245-25 of Schedule 2C to the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 Schedule 2C Division 245 section 245-10 section 245-15 section 245-25 subsection 245-25(2) subsection 245-25(4) subsection 245-25(5)
Subject references: Debt forgiveness Debt waivers