Private ruling: Debt forgiveness
Date of advice: 22 May 2026
Published: 3 August 2026
Ruling period: DD MM 20YY to DD MM 20YY
Date scheme commenced: DD MM 20YY

Ruling: Q1: Will the forgiveness of the loan give rise to a deduction under section 8-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') [1] for its lender? | A1: No. | Q2: Will the forgiveness of the loan be a CGT event for the lender, and if so, will it give rise to a capital loss of $X? | A2: Yes.

Relevant facts and circumstances: Background The Company was registered with ASIC on X XX XXXX The Lender has never worked for the Company. The Lender became an Australian resident for tax purposes in X XX. The Lender is not in the business of money lending. The sole director of the Company is X. X is the Lender's parent. The Loan Agreement A loan agreement between the Lender as the lender and the Company as the borrower has been entered into ('the Loan Agreement'). The funds were used by the Company to expand its operations into X. The intention was for the expansion to grow the Company and its profitability. The Company's financial position Over X years, the Company has incurred continual losses and is experiencing severe financial difficulty, with the expansion into X being the key reason behind the Company stretching its finances and leading to its eventual downfall. In the X income year, the Company confirmed with its creditors that the business could no longer continue and the main assets of the business were sold to a third party for X. With these funds, the Company was able to provide the Lender with their first and only partial loan repayment of X. This was reflected in the Company's financial statements. The Company has not paid any interest on the loan. The Company ceased all business activities in XX XXXX; no business activities were carried on from XX XXXX until X XX XXXX. The Company's financial statements demonstrate the following: ... As at X XX XXXX, the Company had no recoverable assets and no operations. The Deed of Debt Forgiveness On X XX XXXX, the Lender and the Company entered into a Deed of Debt Forgiveness ('the Deed'). The relevant terms of the Deed are as follows:... The reduced cost base of the debt owed to the Lender by the Company is $X.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 110-55 | Income Tax Assessment Act 1997 section 116-20 | Income Tax Assessment Act 1997 section 116-30

Reasons for decision: Summary: Question 1 The forgiveness of the loan owed by the Company to the Lender will not give rise to a deduction under section 8-1 for the Lender. | Detailed Reasoning - Detailed reasoning: Section 8-1 provides the following: (1) You can deductfrom your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. Application to your circumstances The Deed entered into between the Lender and the Company gives rise to the Lender's loss of the amounts advanced under the Loan Agreement. At the time the Deed was entered into, the Lender had not derived any assessable income under the Loan Agreement. Accordingly, the limbs in subsection 8-1(1) will not be met as the loss was not incurred in gaining or producing assessable income. Furthermore, the Lender is not in the business of money lending. The loan is an asset of a capital nature for the Lender. Even if the limbs in subsection 8-1(1) were met, paragraph 8-1(2)(a) would prevent a deduction for the loss incurred by the Lender in entering into the Deed. Accordingly, the forgiveness of the loan owed by the Company to the Lender will not give rise to a deduction under section 8-1 for the Lender. Question 2 | Summary: The forgiveness of the loan owed by the Company to the Lender will result in CGT event C2 happening, giving rise to a capital loss of $. | Detailed Reasoning - Detailed reasoning: Subsection 108-5(1) provides that a CGT asset is any kind of property or legal or equitable right that is not property. Note 1 to section 108-5 provides a non-exhaustive list of examples of CGT assets, with 'debts owed to you' being listed as an example of a CGT asset. Subsection 104-25(1) provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset, inter alia , being released, discharged or satisfied. Where there is a contract, subsection 104-25(2) provides that the time of the event is when you enter into the contract that results in the asset ending. Subsection 104-25(3) provides that you make a capital gain if the capital proceeds from the ending are more than the asset's cost base, and you make a capital loss if those capital proceeds are less than the asset's reduced cost base. Subsection 116-20(1) provides that the capital proceeds from a CGT event are the total of: (a) the money you have received, or are entitled to receive, in respect of the event happening; and (b) 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). If you received no capital proceeds from a CGT event, subsection 116-30(1) provides that you are taken to have received the market value of the CGT asset that is the subject of the event, worked out as at the time of the event. However, for CGT event C2, subsection 116-30(3A) provides that the market value of a CGT asset that is the subject of CGT event C2 is worked out as if the event had not occurred and was never proposed to occur. Subsection 110-25(1) provides that the cost base of a CGT asset consists of 5 elements, being the following: (a) the cost to acquire the CGT asset; (b) incidental costs incurred; (c) costs of owning the CGT asset; (d) capital expenditure incurred to increase or preserve the CGT asset's value; and (e) capital expenditure incurred to establish, preserve or defend your title or right over the CGT asset. Subsection 110-55(2) provides that the elements of the reduced cost base of a CGT asset are the same as the cost base, except the third element. In the event that Division 58 does not apply to the CGT asset, subsection 110-55(3) provides that the third element of a CGT asset's reduced cost base will be any amount included in your assessable income for any income year because of a balancing adjustment. Application to your circumstances The Lender has an intangible CGT asset, being the debt owed to them by the Company under the Loan Agreement. Under the Deed, the Lender agrees to forever release and discharge the Company from all liability to pay the debt owed to the Lender. Upon entering into the Deed, CGT event C2 will happen to the Lender's CGT asset, by way of it being released and discharged. Pursuant to subsection 104-25(2), because there is a contract, the timing of the event is the date the Deed was entered into, being X XX XXXX. It is therefore necessary to determine the capital proceeds from the CGT asset ending and the CGT asset's cost base. Because the Lender received no capital proceeds from the CGT event, subsections 116-30(1) and 116-30(3A) will apply and the Lender will be taken to have received the market value of the CGT asset at the time of the event as if CGT event C2 had not occurred and was never proposed to occur. For the Lender, the market value of the debt owed to them by the Company needs to be worked out on X XX XXXX, as if the Deed was not entered into and was never proposed to be entered into. Although in the context of Agency Development Loans, paragraph 139 of Taxation Ruling TR 2001/9 Income tax: agency development loans states the following in relation to Agency Development Loans which are written off: The market value of the debt will be the greater of the excess of expected recoverable funds over expected recovery expenses, or nil. This will depend upon the facts of each individual case. Where the debt is written off by reason of the suspected insolvency of the debtor, the market value of the debt is expected to be less than its full face value. If the debt is released or cancelled because it is worthless, then the market value will be nil, despite subsection 116-30(3A) of the 1997 Act, as the disposal itself is not considered to affect the market value. In the X income year, the Company informed its creditors that the business could no longer continue, and that its main assets would be sold off. The Company ceased its business activities in XX XXXX, and no business activities were carried on from XX XXXX until X XX XXXX. The Company generated no revenue from its business activities in the X, X, or X income years. Apart from a nominal foreign exchange gain in the X income year, the only other revenue generated by the Company during this period was from the sale of the Company's business assets, which it used to repay part of the loan it owed to the Lender. As at X XX XXXX, the Company had total liabilities of $X and total assets of $X. Apart from the debt owed to the Lender, the Company's other liabilities include a bank forbearance, loans payable to X other entities, and liabilities owed to foreign currency trade creditors. As at X XX XXXX, it is evident that the Company is unable to repay its debts, including the loan owed to the Lender. Until the Deed was entered into on X XX XXXX, the Company had no business assets had not conducted any business activities to generate revenue. If the Deed had not been entered into between the Company and the Lender on X XX XXXX, and was never proposed to be entered into, it is clear that the debt would have been unrecoverable for the Lender. The market value of the Lender's CGT asset worked out in accordance with subsections 116-30(1) and 116-30(3A) will therefore be nil. The reduced cost base of the Lender's CGT asset is $X. Accordingly, the Lender will make a capital loss of $X from CGT event C2 happening to the debt owed to it by the Company under the Loan Agreement. [1] All legislative references in this ruling are to the ITAA 1997 unless otherwise specified.