ATO ID 2003/590: Commercial debt forgiveness - debt forgiven because of inability to repay and reasons of love and affection.
Date of decision: 23 June 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
Where a Debtor is unable to repay part of a debt can paragraph 245-40(c) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) operate to cause the Schedule not to apply to the forgiveness of that part of the debt where the balance of the debt is forgiven by the creditor for reasons of natural love and affection?

Decision
No. Paragraph 245-40(c) of Schedule 2C to the ITAA 1936 will only operate to exclude the balance of the debt that the debtor could have repaid.

Facts
Debtor incurred a debt from Creditor, a natural person. The debt was a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936. The whole of the debt was forgiven by Creditor after 27 June 1996. At the time of forgiveness Debtor had the ability to repay one third of the debt which Creditor forgave for reasons of natural love and affection.

Reasons for decision
Summary: Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C applies where a forgiveness of a commercial debt occurs after 27 June 1996. Paragraph 245-40(c) of Schedule 2C to the ITAA 1936 provides that Schedule 2C does not apply where the debt is forgiven for reasons of natural love and affection. Section 245-245 of Schedule 2C to the ITAA 1936 defines debt for the purposes of the Schedule as 'includes a part of a debt' As the Creditor had two distinct reasons for the forgiveness it is considered that two acts of forgiveness have occurred in these circumstances, in relation to the two respective parts of the overall debt. Firstly, it is accepted that the forgiveness in respect of the one third part of the debt that Debtor was able to repay, is excluded from the operation of Schedule 2C to the ITAA 1936 pursuant to paragraph 245-40(c) thereof. Secondly, the balance of the debt that Debtor was unable to repay has also been forgiven pursuant to subsection 245-35(1) of Schedule 2C to the ITAA 1936 but that forgiveness is not excluded by paragraph 245-40(c) thereof, because it was forgiven due to an inability to repay, rather than for reasons of natural love and affection.

Legislative references: Income Tax Assessment Act 1936 Schedule 2C, section 245-10 Schedule 2C, section 245-25 Schedule 2C, section 245-35 Schedule 2C, paragraph 245-40(c) Schedule 2C, section 245-245
Subject references: Debt forgiveness Debt waivers