ATO ID 2005/12: Commercial Debt Forgiveness - interaction with Subdivision 165-CD of the Income Tax Assessment Act 1997 - no net forgiven amount
Date of decision: 22 December 2004
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Does subsection 165-115ZA(2) of the Income Tax Assessment Act 1997 (ITAA 1997) still nullify the operation of section 165-115ZA in respect of a relevant debt interest, where the Loss Company does not have a net forgiven amount to be applied under Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936), if that debt interest is forgiven?

Decision
Yes. Subsection 165-115ZA(2) of the ITAA 1997 nullifies the operation of section 165-115ZA where section 245-10 in Schedule 2C to the ITAA 1936 applies, which is not dependent upon there being a net forgiven amount under subsection 245-85(2) of Schedule 2C.

Facts
Loss Company has an alteration time under section 165-115L of the ITAA 1997 on 1 January 2002. In respect of that alteration time Loss Company has an overall loss under subsection 165-115R(5) of the ITAA 1997. Creditor Company has a 'relevant debt interest' as defined in subsection 165-115Y(1) of the ITAA 1997 of $40,000 in Loss Company. That debt is a 'commercial debt', as defined in section 245-25 of Schedule 2C to the ITAA 1936, of Loss Company. Creditor Company released Loss Company from that $40,000 debt on 6 June 2002 for no consideration. Having regard to the business of Creditor Company, that debt is not a moneylending debt as defined in subsection 245-245(1) of Schedule 2C to the ITAA 1936. The release of the debt constituted a forgiveness under section 245-35 of Schedule 2C to the ITAA 1936. The market value of the debt at time of forgiveness was $40,000 as Loss Company was solvent at all relevant times.

Reasons for decision
Summary: Subsection 165-115ZA(2) of the ITAA 1997 nullifies the application of section 165-115ZA to the ITAA 1997 that would otherwise require reductions to reduced cost base of relevant debt interest(s) where section 245-10 of Schedule 2C to the ITAA 1936 also applies at the same time or a later time. Subsection 245-10(1) of Schedule 2C to the ITAA 1936 provides that subject to subsection (2) thereof, that Division 245 (Schedule 2C) of the ITAA 1936 applies to the forgiveness of a commercial debt. In the present instance, Loss Company will have no net forgiven amount under subsection 245-85(2) of the ITAA 1936 in respect of the debt forgiveness, as Loss Company (as debtor) will be taken by subsection 245-65(2) of the ITAA 1936 to have paid consideration equal to the market value of the debt at the time of forgiveness. The absence of a net forgiven amount does not mean that section 245-10 of Schedule 2C to the ITAA 1936 has not applied. Accordingly, no reduction to the reduced cost base of the $40,000 relevant debt interest is required under Subdivision 165-CD of the ITAA 1997 because of subsection 165-115ZA(2) thereof.

Legislative references: Income Tax Assessment Act 1936 Schedule 2C section 245-10 subsection 245-10(1) subsection 245-10(2) section 245-25 section 245-35 subsection 245-65(2) subsection 245-85(2) subsection 245-245(1)
Related ATO interpretative decisions: ATO ID 2005/11 | ATO ID 2005/13
Subject references: Commercial debt forgiveness Debt interest Net forgiven amount