Private ruling: Income tax – commercial debt forgiveness
Date of advice: 15 November 2017
Published: April 2018
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Has the obligation of the partnership to pay the debt held with the financial institution been released or waived, or extinguished under section 245-35 of the Income Tax Assessment Act 199 7 (ITAA 1997)? | A1: No | Q2: Did the partnership enter into an arrangement with the financial institution under section 245-45 of the ITAA 1997? | A2: No


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 245-10 | Income Tax Assessment Act 1997 Section 245-35 | Income Tax Assessment Act 1997 Subsection 245-45(1) | Income Tax Assessment Act 1997 Subsection 245-45(2)

Reasons for decision: Summary: Division 245 of the ITAA 1997 relates to the forgiveness of commercial debts. Section 245-10 of the ITAA 1997 stipulates that a debt will be a ‘commercial debt’ if: (a) the whole or any part of interest, or of an amount in the nature of interest, paid or payable by you in respect of the debt has been deducted, or can be deducted, by you; or (b) interest, or an amount in the nature of interest, is not payable by you in respect of the debt but, had interest or such an amount been payable, the whole or any part of the interest or amount could have been deducted by you; or (c) interest or an amount mentioned in paragraph (a) or (b) could have been deducted by you apart from the operation of a provision of this Act (other than paragraphs 8-12(a), (b) and (c)) that has the effect of preventing a deduction. To determine whether a commercial debt exists we have to look at the borrower's purpose and not that of the lender ( Federal Commissioner of Taxation v Tasman Group Services Pty Ltd 2009 ATC). If the use of the loan could result in an allowable deduction of interest were interest to be charged, a commercial debt exists. Further, where only part of the interest that is paid or assumed to be paid in respect of a debt is deductible, the debt is a commercial debt. Section 245-35 of the ITAA 1997 states that 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 the recovery of the debt ends, because of the operation of a statute of limitations, without the debt having been paid. Subsection 245-45(1) of the ITAA 1997 provides that: If: (a) the debtor and the creditor in relation to a debt enter into an arrangement; and (b) under the arrangement, the debtor's obligation to pay the debt is to cease at a particular future time; and (c) the cessation of the obligation is to occur without the debtor incurring any financial or other obligation (other than an obligation that, having regard to the debtor's circumstances, is of a nominal or insignificant amount or kind); Subdivisions 245-C to 245-G apply as if the debt were forgiven when the arrangement is entered into. Subsection 245-45(2) of the ITAA 1997 provides if, after the arrangement is entered into, the debt is forgiven, the later forgiveness is disregarded for the purposes of those Subdivisions. | Detailed Reasoning - Application to the partnership’s circumstances: A debt will come within the provisions of Division 245 of the ITAA 1997 if the interest payable on the loans has been deducted, or can be deducted. In this case, a review of the information indicates that the loan facilities were used for the purpose of carrying on the business of the partnership. Therefore the interest is deductible. Accordingly, the debt is a commercial debt and falls within the provisions of Division 245 of the ITAA 1997. However, the Commissioner accepts that the partnership’s obligation to pay the debt has not been released or waived, or otherwise extinguished (section 245-35 of the ITAA 1997). Further, the Commissioner accepts that the Deed entered into with the financial institution does not satisfy all the requirements to be an arrangement for the purposes of section 245-45 of the ITAA 1997. Paragraph 245-45(1)(c) of the ITAA 1997 has not been satisfied as the partners had to meet extensive obligations under the Deed. Therefore, the debt forgiveness rules under Division 245 of the ITAA 1997 do not apply.

Relevant facts: The partnership conducted a business. | To fund the partnership’s acquisition of business assets and to provide working capital for the partnership’s business, the partners obtained loans from a financial institution. | The loans were secured by registered mortgages over assets of the partnership. | The partnership business deteriorated and substantial losses were made. | The partners of the partnership defaulted on the loans. | The partners entered into an agreement with the financial institution whereby at the end of a certain period the partners would be released from the remaining debt if all the obligations of the partners under the agreement were fulfilled. The obligations of the partners were significant. | Not all the obligations of the partners were met so consequently the financial institution has not provided the partners a release from their liability.