ATO ID 2007/167: Commercial Debt Forgiveness: whether a debt used to acquire a subordinated note can be a non-recourse debt
Date of decision: 29 June 2007
Year of income: 30 June 2007
Business line: Public Groups and International

Issue
Whether a subordinated note can be 'property' for the purposes of determining if a debt is non-recourse for the purposes of section 245-60 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936).

Decision
Yes. The term 'property' in the context of section 245-60 of Schedule 2C to the ITAA 1936 is not limited to real property and can encompass financial instruments such as subordinated notes.

Facts
Debtor incurred the relevant debt in borrowing money from creditor. Debtor used the relevant money to acquire a subordinated note. The debt constituted a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936. The debt was subsequently forgiven for the purposes of section 245-35 of Schedule 2C to the ITAA 1936 by creditor after debtor defaulted in payment of the debt. Creditor's rights in respect of debtor's default were limited in the manner specified by subsection 245-60(1) of Schedule 2C to the ITAA 1936.

Reasons for decision
Summary: Section 245-60 of Schedule 2C to the ITAA 1936 provides a special rule for working out the notional value of a non-recourse debt. To constitute a non-recourse debt under that section the rights of the creditor in the event of default in the payment of the debt or the payment of interest must be limited in one or more ways listed in subsection 245-60(1) of Schedule 2C to the ITAA 1936. This is the case in the present circumstances. Furthermore, the definition requires that the debt was incurred directly in respect of the financing of the acquisition, construction or development of property. In this instance the debt was incurred directly in debtor acquiring the subordinated note. The term 'property' is not defined for the purposes of section 245-60 of Schedule 2C to the ITAA 1936 and therefore takes its ordinary meaning.

Legislative references: Income Tax Assessment Act 1936 Schedule 2C, section 245-25 Schedule 2C, section 245-35 Schedule 2C, section 245-60 Schedule 2C, subsection 245-60(1)
Related ATO interpretative decisions: ATO ID 2007/168
Subject references: Borrowings & loans Commercial debt Commercial debt forgiveness Dealings & transactions Non recourse loans