Private ruling: Commercial debt forgiveness
Published: September 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Will paragraph 245-40(e) of the Income Tax Assessment Act 1997 (ITAA 1997) operate to exempt the forgiveness of a commercial debt owed by you to two beneficiaries from the commercial debt forgiveness provisions contained in Division 245 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are a discretionary family trust (the trust), which earns primary production income. In a previous year, two of your beneficiaries ("the parents") lent person 1 and person 2 as trustees of the trust a sum of money to purchase two-thirds of the land on which the trust conducts the business. The person 1 and person 2 are the children of the parents, and their spouse. Your beneficiaries are all family members. The loan agreement is documented and signed with 0% interest payable over 15 years with quarterly payments of $xxx. The loan agreement includes a special conditions clause providing that on the death of the survivor of the parents, your liability to pay the loan payments shall be a continuing liability as to X% of the amount outstanding as at the date of death of the survivor of the parents and the remaining Y% shall be forgiven and discharged in full. The Y% loan balance at date of death of the last surviving lender is forgiven to you to assist in providing for family members and the only reason that the lenders are doing this is by reason of natural love and affection for the debtor, being a family trust with family members as beneficiaries. The debtor is not an employee of the creditor. FBT is not payable in respect of the debt.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 245.

Reasons for decision: Summary: Division 245 of the ITAA 1997 is about forgiveness of commercial debts. Section 245-10 of the ITAA 1997 provides a debt is a commercial debt if the whole or any part of interest, or of an amount in the nature of interest, paid or payable in respect of the debt is or would be allowable as a deduction to the debtor. The operative rules for Division 245 of the ITAA 1997 are contained in Subdivisions 245-C to 245-G. In summary, these operative rules provide, when a creditor forgives a commercial debt you (the debtor) owe, the forgiven amount is offset against amounts that could otherwise reduce your taxable income in the same or a later income year, namely: (a) your tax losses and net capital losses; (b) capital allowances and some similar deductions; and (c) the cost bases of your CGT assets. An exclusion to Division 245 applies, under paragraph 245-40(e) of the ITAA 1997, where a commercial debt is forgiven for reasons of natural love and affection. This paragraph does not specify that creditor or debtor must be a natural person. It only requires that the debt was 'forgiven for reasons of natural love and affection'. In your case, your trustees obtained a loan from two of your beneficiaries (the parents) to fund the acquisition of land. If interest were to be charged on this loan, you would be entitled to a deduction. It is therefore considered that a 'commercial debt' exists for the purposes of paragraph 245-10(b) ITAA 1997. The lenders will forgive part of the debt you owe on the death of the last surviving lender to assist in providing for family members. The only reason that the lenders are doing this is by reason of natural love and affection for the debtor, being a family trust with family members as beneficiaries. Therefore, the debt forgiveness provisions in Division 245 of the ITAA 1997 will not apply as the debt is excluded where your creditor forgives the debt for reasons of natural love and affection towards your beneficiaries.