Private ruling: Commercial Debt Forgiveness
Date of advice: 16 December 2015
Published: March 2016
Ruling period: 1 July 20WW to 30 June 20YY | 1 July 20YY to 30 June 20ZZ
Date scheme commenced: October 20WW

Ruling: Q1: Is there an amount under section 245-65 of the Income Tax Assessment Act 1997 that Company Pty Ltd can offset against the debt of $XXX,XXX forgiven in year ending 30 June 20YY? | A1: No

Relevant facts and circumstances: 1. A partnership between the J Trust and the B Trust (the Partnership) operated business, hiring equipment to Company Pty Ltd (Company) and Sub Coy. Pty Ltd (Sub-Coy). 2. Company owns 100% of the shares in Sub-Coy. 3. The Agreement (undated copy provided) sets out the terms for the dissolution of the Partnership and separation of joint business arrangements by the Completion Date in 20WW. 4. The Parties to the Agreement are J, P, M, J Entity and T Pty Ltd as trustee for the B Entity. 5. Terms for the restructure are set out under the Agreement. 6. A clause refers to a reconciliation attached at Annexure B which details amounts owing to Company as well as amounts owing to J and J Entity. An amount of $X is detailed as being owed to Company and an amount of $Y is detailed as being owed to J, J Entity or the J Group. 7. A clause states that 'the Parties have agreed that in satisfaction of the amounts outstanding, the net amount of $Z will be paid by J Entity to Company, prior to Completion.' 8. Immediately prior to restructure under the Agreement there was a credit shareholder loan of $A owed by Company to J Entity. 9. No documentation has been provided in respect of the loans or regarding the forgiveness of the debt of $A owed by Company to J Entity. Company has formed the view that, as a result of the Agreement, J Entity cannot recover the amount of the shareholder loan. 10. The Statement of Financial Position for Company as at 30 June 20WW also shows that there was also a loan of $B owed by Company to J Entity and B Entity jointly and a loan of $C owed by Company to B Entity. The client has advised that these debts have not been forgiven. 11. In December 20WW shares in Company held by J Entity were transferred to B Entity.

Relevant legislative provisions: Division 245 of the Income Tax Assessment Act 1997 | Section 245-10 of the Income Tax Assessment Act 1997 | Section 245-35 of the Income Tax Assessment Act 1997 | Section 245-48 of the Income Tax Assessment Act 1997 | Section 245-65 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Is there an amount under section 245-65 that Company Pty Ltd can offset against the debt of $A forgiven in year ending 30 June 20YY? Division 245 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the rules regarding the forgiveness of commercial debts. Unless stated otherwise all legislative references are in regard to the ITAA 1997. Section 245-1 states: When a creditor forgives a commercial debt you owe, you make a gain. This is usually not included in your assessable income. Instead, this Division offsets the forgiven amount against amounts that could otherwise reduce your taxable income in the same or a later income year. Those amounts are: (a) your tax losses and net capital losses; and (b) capital allowances and some similar deductions; and (c) the cost bases of your CGT assets. Debt The debt of $A is a legally enforceable obligation for Company to pay J Entity. Commercial debt Under section 245-10 a debt is a commercial debt if interest on the debt was or could have been deducted from the debtor's assessable income. A loan of $A was made to Company by J Entity for working capital and therefore J Entity could have claimed a deduction for interest had interest been levied on the loan. The loan of $A owed to J Entity is therefore a commercial debt. Forgiveness of a debt Under section 245-35 a debt is forgiven if and when: (a) the debtor's obligation to pay the debt is released or waived, or is otherwise extinguished other than by repaying the debt in full; or (b) the period within which the creditor is entitled to sue for recovery of the debt ends, because of the operation of a statute of limitations, without the debt having been paid. Under a clause of the Agreement each Party is released from any Claim made by the other Parties in respect of the matters covered by the recitals. The loan of $A, owed by Company to J Entity, is not covered by that clause because it is not a claim made by one Party against another Party to the agreement. Company is not a party to the Agreement and therefore is not released or discharged under that clause. The client has also advised that the loan of $B owed by Company to J Entity and B Entity jointly has not been forgiven. No other documentation has been provided to show that the debt has been forgiven. Therefore the debt is not considered to be forgiven by operation of the Agreement or any other arrangement that occurred in association with the Agreement. The amount of the forgiveness Section 245-48 states: The amount of forgiveness (called the gross forgiven amount) for the debtor reflects the loss that the creditor makes for tax purposes. It is worked out in 2 steps: (a) the value of the debt when it was forgiven is worked out on the basis that you were solvent both then and when you incurred the debt; and (b) the value of the debt is then offset by any consideration given for the forgiveness of the debt. The difference between the value of the debt and the amount offset is the gross forgiven amount. If the debt was owed by several debtors, the gross forgiven amount is divided between them equally. The value of the debt on Completion Date was $A. Even if the debt was forgiven under the Agreement there is no dissectible amount that could be construed as the value for consideration for the forgiveness of the debt. Various types of consideration were made under the Agreement by all parties for multiple events. The obligations and consideration made under the agreement are summarised in recitals H, I and J of the Agreement. Under the Agreement P, B Entity and M's obligations include: • The requirement to pay the ABC Debt, • The requirement to pay the amount of $P to J, and • The requirement to indemnify J and J Entity from any claim against J and J Entity arising from the operation of the Partnership, Company or Sub-Coy or the ABC Debt. Under the Agreement J or J Entity's obligations include: • The requirement to pay $Z to Company, • The requirement to confer good and clear title to the shares in Company, • The requirement for J to resign as director of Company and Sub-Coy; • The requirement to ensure that the Partnership assets, which are core to the business of Company, are vested in B Entity; • The requirement to facilitate the handover and transition to Company business systems and records in Company; • The requirement to ensure that Company and Sub-Coy will continue to have the control and benefit of the existing customer agreements of Company and Sub-Coy; If there were debts forgiven by virtue of the operation of the Agreement there is no dissectible amount that can clearly be identified under the Agreement as consideration specifically for the forgiveness of the debt. Therefore there is no amount paid under the Agreement that can be taken as consideration for the forgiveness of a debt.