Private ruling: CGT - capital loss - debt forgiven
Date of advice: 12 September 2025
Published: 17 November 2025
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Did you make a capital loss under section 104-25 of the Income Tax Assessment 1997 (ITAA 1997) when you entered into the Deed of forgiveness with the Debtor? | A1: No. At the time of the forgiveness, the debtor remained solvent and continued to trade. No consideration was received by you in exchange for the forgiveness of the loan, and the parties were not dealing at arm's length; therefore, the capital proceeds are taken to be the market value of the debt at the time of the event, which is its face value. As the cost base and reduced cost base of the loan are also equal to its face value, you did not make a capital gain or a capital loss from the forgiveness of the debt.

Relevant facts and circumstances: You are the director and shareholder of the company (the debtor). From 20YY to 20YY financial years, you loaned $XXX,XXX to the debtor to support its business operations. As part of efforts to support the debtor's restructure and ongoing viability, you formally forgave the loan in an effort to ensure the company remains solvent and viable. A deed of forgiveness was executed on 30 June 20YY releasing the debtor from its repayment obligation. You are not in the business of lending money. No consideration was received by you in exchange for forgiveness. The debtor remains solvent and continues to trade.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 116-30 | Income Tax Assessment Act 1997 Subdivision 108-C | Income Tax Assessment Act 1997 Division 245

Reasons for decision: Summary: A CGT asset is defined as any kind of property, or a legal or equitable right that is not property under subsection 108-5(1) of the ITAA 1997. Relevantly, to avoid doubt, a part of, or an interest in, an asset referred to in subsection (1), is a CGT asset (subsection 108-5(2) of the ITAA 1997). Examples of CGT assets include land and buildings; shares in a debtor and units in a unit trust; options; debts owed to you; a right to enforce a contractual obligation; and foreign currency. A debt owed to a lender is a CGT asset for the purposes of section 108-5 of the ITAA 1997 (CGT Determination Number 2 Capital Gains: What are the CGT consequences for the lender (Creditor) when a debt is waived? (TD 2) The debt is disposed of when the lender waives or forgives the debt. As such a CGT event will happen to the lender at that time. The relevant or most specific CGT event is determined depending on the facts and circumstances of the case (subsection 102-25(1) of the ITAA 1997. Relevantly, subsection 104-25(1) of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. The time of the event is: (a) when you enter into the contract that results in the asset ending; or (b) if there is no contract - when the asset ends. You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997). Whether the lender makes a capital gain or capital loss from the CGT event will depend on the consideration (capital proceeds) received for the forgiveness of debt and the appropriate cost base of the asset which is the debt. General rules about cost base, reduced cost base and capital proceeds Division 110 of the ITAA 1997 tells you how to work out the cost base and reduced cost base of a CGT asset. When CGT event C2 applies the cost base of the CGT asset is relevant in working out if a capital gain has been made from the event, whereas the reduced cost base of the CGT asset is relevant in working out if a capital loss has been made. The cost base of a CGT asset consists of 5 elements (subsection 110-25(1) of the ITAA 1997), which are: 1. money or property you give, or are required to give, for the asset 2. incidental costs of acquiring the asset, or that relate to the CGT event 3. costs of owning the asset 4. capital expenditure incurred to increase or preserve the asset's value, or to install or move it, and 5. capital expenditure incurred to establish, preserve or defend your title to the asset, or a right over the asset. All of the elements of the reduced cost base of a CGT asset are the same as those for the cost base, except the third element is substituted with the following (section 110-55 of the ITAA 1997): 3. balancing adjustment amounts, that is, amounts that are assessable because of a balancing adjustment for the asset, or that would be assessable if certain balancing adjustment relief was not available. The reduced cost base does not include any costs you have incurred for which you have claimed a tax deduction, or have omitted to claim, but can still claim a deduction for because the period for amending the relevant income tax assessment has not expired. Market value substitution rule The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening; and the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event) (subsection 116-20(1) of the ITAA 1997. Modifications to the general rules There are modifications to the general rules that may apply in respect to the cost base, reduced cost base and capital proceeds. The market value substitution rule in section 112-20 of the ITAA 1997 applies to substitute the first element of the cost base and reduced cost base of a CGT asset you acquire from another entity with the market value of that asset if you did not deal at arm's length with the other entity in connection with the acquisition. If you receive no capital proceeds from a CGT event a market value substitution rule also applies. Subsection 116-30(1) of the ITAA 1997 provides that you are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out as at the time of the event. If you need to work out the market value of a CGT asset that is the subject of CGT event C2, you work it out as if the event had not occurred and was never proposed to occur (subsection 116-30(3A) of the ITAA 1997). The market value of a debt is its face value if the entity that is released from paying it is solvent (paragraph 27 of Taxation Ruling TR 96/23). TD 2 provides that generally, the cost base of a debt to the lender is the (outstanding) amount of the loan. However, the cost base of a debt can be reduced below face value to market value in accordance with the market value substitution rule if you did not deal with the debtor at arm's length ( QFL Photographics Pty Ltd v Commissioner of Taxation [2010] AATA 758). TD 2 also provides that if you (the lender) receive no consideration for the disposal of the debt, you are taken to have received an amount equal to the market value of the debt at the time of the disposal. You are also taken to receive market value on the disposal of the debt when the consideration received is less than the market value of the debt. The market value of the debt at the time of its disposal is worked out as though the debt was not waived and was never intended to be waived. Arm's length Parties are said to be dealing at arm's length if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks not only at the relationship between the parties but also at the quality of the bargaining between them. It is evident from the facts you have provided that you did not deal at arm's length when providing and subsequently forgiving the loan to the debtor. As the related entities are under common ownership, it cannot be said that each party has acted independently or has not exercised influence or control over the other in connection with the loans. In the circumstances, it is unlikely that a non-arm's length party would have loaned funds to the debtor without a loan agreement and/or guarantees from the directors. It is also unlikely that an entity would forgive a loan for no consideration without the presence of formal winding up or deregistration procedures in progress. Application to your circumstances The loan provided by you to the debtor is CGT asset under section 108-5 of the ITAA 1997. The formal forgiveness of this loan, documented by a Deed of forgiveness executed, resulted in the ending of your ownership of that asset, thereby triggering CGT event C2 in section 104-25 of the ITAA 1997. Given that you are both a director and shareholder of the debtor, the parties are not considered to be dealing at arm's length - either at the time the loan was made or when it was forgiven. As a result, the market value substitution rules apply to determine the capital proceeds, cost base, and reduced cost base of the loan. Under subsection 116-30(3A) of the ITAA 1997, the market value of the debt is determined as though the forgiveness had not occurred and was never proposed. In this case, the debtor is solvent and continues to trade, and there is no indication that the debt was impaired or unenforceable. Therefore, the market value of the loan at the time of forgiveness is equal to its face value. You received no consideration for the forgiveness; therefore, the capital proceeds are taken to be the market value of the debt at the time of the event. As the cost base and reduced cost base of the loan are also equal to its face value, you did not make a capital gain or a capital loss from the forgiveness of the debt.