Private ruling: The forgiveness of loans
Date of advice: 24 September 2019
Published: November 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do the Commercial Debt Forgiveness provisions in Division 245 of the Income Tax Assessment Act 1997 (ITAA 1997) apply when the debt is forgiven out of natural love and affection? | A1: No.

Relevant facts and circumstances: On X June 20XX, X loaned money to Y. The loan was used to purchase a property. The loan has since increased for further property purchases, property expenses, share purchases and repayments of other loans. The loan is not covered by a commercial loan agreement, there have been no regular repayments made, nor has any interest been paid in relation to the loan. X has no need to be repaid by Y and would now like to gift this money to Y, and the loan is forgiven under natural love and affection. The proposed loan forgiveness is not due to Y being unable to repay the loans.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 245-10, | Income Tax Assessment Act 1997 section 245-40, and | Income Tax Assessment Act 1997 subsection 245-40(e).

Reasons for decision: Summary: Division 245 of the Income Tax Assessment Act 1997 (ITAA 1997) is about forgiveness of commercial debts. Section 245-10 of the ITAA 1997 provides that 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. Section 245-40 of the ITAA 1997 lists specific circumstances where the forgiveness of a debt will not come within the operation of Division 245 of the ITAA 1997. An exclusion to Division 245 applies under subsection 245-40(e) of the ITAA 1997 where a commercial debt is forgiven for reasons of natural love and affection. In these circumstances, X are forgiving all of the debt owed by Y for natural love and affection. The loan is not covered by a commercial loan agreement there have been no regular repayments made, nor has any interest been paid in relation to the loan As X are forgiving the debt for natural love and affection, the commercial debt forgiveness provisions under section 245-40 of the ITAA 1997 will not apply.