ATO ID 2004/981: Commercial debt forgiveness - Capital loss
Date of decision: 9 December 2004
Year of income: Year ended 30 June 2005
Business line: Public Groups and International

Issue
Can a creditor that is an exempt entity, as defined by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), agree to forgo under section 245-90 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936), a capital loss as the result of the forgiveness of a commercial debt?

Decision
No. Any capital loss that the creditor otherwise would have made in respect of the forgiveness is disregarded under section 118-70 of the ITAA 1997 such that the creditor has no entitlement to a capital loss that it can forgo.

Facts
A commercial debt owed by a debtor company was forgiven on 22 March 2004. The forgiveness meant that the debtor had a net forgiven amount for the purposes of Schedule 2C to the ITAA 1936. The relevant creditor company was an exempt entity as defined in subsection 995-1(1) of the ITAA 1997. The creditor and debtor were under common ownership at all relevant times. The creditor would have made a capital loss in respect of the forgiveness that was disregarded by section 118-70 of the ITAA 1997. The creditor and debtor want to make an agreement under subsection 245-90(2) of Schedule 2C to the ITAA 1936 in respect of the relevant forgiveness.

Reasons for decision
Summary: The creditor and debtor satisfy the conditions in subsection 245-90(1) of Schedule 2C to the ITAA 1936. However, in order to make an agreement to forgo all or part of a capital loss it is necessary that the creditor be otherwise entitled to that loss. Whilst the creditor did incur a capital loss in respect of the forgiveness that capital loss is disregarded by section 118-70 of the ITAA 1997 such that the creditor has no entitlement to a capital loss that it can forgo. The disregarding of a capital loss under section 118-70 of the ITAA 1997 is compulsory and not dependent on any choice being made by the creditor.

Legislative references: Income Tax Assessment Act 1936 Schedule 2C section 245-90 subsection 245-90(1) subsection 245-90(2)
Subject references: Capital losses Commercial debt forgiveness Common ownership Net forgiven amount