Private ruling: Continuity of Ownership, Capital Gain event L3 and Debt Forgiveness
Date of advice: 11 January 2017
Published: March 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: Income year starting 1 July 2016

Ruling: Q1: Will the Acquisition of the XYZ Securities result in XYZ failing the same owners test in section 165-12 of the Income Tax Assessment Act 1997 ("ITAA 1997")? | A1: No | Q2: Does section 705-27 of the ITAA 1997 reduce the tax cost setting amount of XYZ LLC's ("LLC") retained cost base assets, comprising the New Notes and Accrued Interest Receivable on the New Notes, and thus reduce the capital gain under CGT event L3 upon LLC's entry into XYZ income tax consolidated group? | A2: Yes | Q3: Are the New Notes and Accrued Interest Receivable between XYZ and LLC forgiven for the purposes of Division 245 of the ITAA 1997 upon LLC joining the XYZ income tax consolidated group? | A3: No

Relevant facts and circumstances: XYZ is an Australian listed public company and the parent company of the XYZ Group. XYZ is listed on the Australian Securities Exchange ("ASX"). XYZ is the head company of the XYZ income tax consolidated group ("XYZ Tax Group"). The XYZ Trust is a special purpose trust to raise funds for the XYZ group. The XYZ Trust is a public unit trust that was settled with the issue of a single ordinary unit with a face value of $X held by XYZ. Other units in the XYZ Trust called XYZ Securities were issued to the value of $X. As part of the establishment of the composite XYZ Trust financing structure, a limited liability company ("LLC"), was established in a foreign country. LLC is treated as transparent for the foreign country’s federal tax purposes. On establishment of LLC, XYZ invested $X to subscribe for one class of common limited liability company interests in LLC ("LLC Common Share"). The LLC Common Share carries 100% of the voting and management rights in LLC. The LLC Common Share gives XYZ the right to appoint the Board of Directors of LLC which has absolute discretion over any distribution made by LLC. Post establishment of LLC, XYZ Trust used the $X proceeds from the issue of XYZ Securities to subscribe for X preference shares in LLC ("LLC Preference Shares"). The LLC Preference Shares do not provide the Trustee of the XYZ Trust with any voting rights in LLC. The payment of dividends on both the LLC Common Share and LLC Preference Share is controlled by XYZ as the holder of the LLC Common Share. Post issue of the LLC Preference Shares, the $X proceeds were used by LLC to subscribe for loan notes ("the Notes") issued by XYZ (Overseas). At that point in time, XYZ (Overseas) was a non-resident of Australia for taxation purposes. lt was an indirect wholly owned subsidiary of XYZ. XYZ (Overseas) used the $X proceeds received as consideration for the issue of the Notes to retire existing debt. The Notes that were issued by XYZ (Europe) to LLC were sold by LLC to XYZ in exchange for XYZ's newly issued notes ("New Notes"). The New Notes have an aggregate principal face value of $X and are interest bearing. The market value of the New Notes is greater than the accounting carrying value of the New Notes. XYZ contributed the Notes to its wholly owned Australian subsidiary, XYZ Australia in return for equity. XYZ Australia then in turn contributed the Notes to its wholly owned Australian subsidiary XYZ Associates in return for equity. These subsequent transactions were within the XYZ Tax Group and thus ignored for Australian income taxation purposes. The Notes subsequently ceased to exist. For the purposes of this Ruling, LLC is treated as a partnership for all sections of the ITAA 1936 (other than Division 5A of Part Ill of the ITAA 1936) and the ITAA 1997 (other than Subdivisions 830-A and C of the ITAA 1997) and the Tax Administration Act 1953, to the extent it relates to the ITAA 1936 and ITAA 1997. The treatment of LLC as a partnership for Australian income tax purposes has the effect that XYZ Trust and XYZ, as shareholders in the LLC, are treated as partners in the LLC partnership. The Acquisition of XYZ The proposed transaction would be implemented by the Trust Scheme. Pursuant to the transaction XYZ would acquire the remaining XYZ Securities ("Acquisition"). The proposed steps of the acquisition are as follows: (1) The Trust Scheme must be approved by the requisite majorities and be subject to judicial advice of the Court. (2) The consideration for the Trust Scheme is XXX ordinary XYZ shares for every one XYZ Security. (3) Once XYZ acquires the balance of the XYZ Securities, XYZ will hold 100% of the XYZ Securities. (4) On the 100% acquisition of the XYZ Securities, more than 20% of new XYZ shares will have been issued to unit holders of XYZ Trust. (5) The XYZ Trust will become wholly owned by XYZ. The XYZ Trust and the LLC will join the XYZ Tax Group. (6) At some later stage, XYZ will require the Trustee of the XYZ Trust to redeem the XYZ Preference Securities in exchange for the Trustee transferring to XYZ the LLC Preference Shares. (7) LLC will redeem the LLC Preference Shares held by XYZ in exchange for XYZ redeeming the New Notes and accrued interest held by LLC. The redemption price of the New Note is equal to the Face Value together with all interest which is accrued but unpaid at the Redemption Date.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 26BB | Income Tax Assessment Act 1936 Section 7OB | Income Tax Assessment Act 1936 Section 159GP | lncome Tax Assessment Act 1936 Division 36 | Income Tax Assessment Act 1997 Section 104-510 | Income Tax Assessment Act 1997 Section 105-510 | Income Tax Assessment Act 1997 Division 165 | Income Tax Assessment Act 1997 Division 166 | Income Tax Assessment Act 1997 Section 166-5 | Income Tax Assessment Act 1997 Section 165-12 | Income Tax Assessment Act 1997 Section 166-145 | Income Tax Assessment Act 1997 Section 165-155 | Income Tax Assessment Act 1997 Section 166-175 | Income Tax Assessment Act 1997 Section 166-220 | Income Tax Assessment Act 1997 Section 166-225 | Income Tax Assessment Act 1997 Section 166-270 | Income Tax Assessment Act 1997 Section 166-272 | Income Tax Assessment Act 1997 Division 245 | Income Tax Assessment Act 1997 Section 245-10 | Income Tax Assessment Act 1997 Section 245-35 | Income Tax Assessment Act 1997 Section 245-36 | Income Tax Assessment Act 1997 Section 245-37 | Income Tax Assessment Act 1997 Section 245-45 | Income Tax Assessment Act 1997 Division 701 | Income Tax Assessment Act 1997 Section 701-1 | Income Tax Assessment Act 1997 Section 703-15 | Income Tax Assessment Act 1997 Section 703-20 | Income Tax Assessment Act 1997 Division 705 | Income Tax Assessment Act 1997 Section 705-25 | Income Tax Assessment Act 1997 Section 703-27 | Income Tax Assessment Act 1997 Division 820 | Income Tax Assessment Act 1997 Subsection 995-1

Reasons for decision: Summary: No. The Acquisition of the XYZ Securities will not result in XYZ failing the same owners test in section 165-12 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 165-12 Same owner test To satisfy the same owner test in section 165-12, the company must satisfy three conditions during the ownership test period - the period from the start of the loss year to the end of the income year. The three conditions are as follows: ● There must be persons who had more than 50% of the voting power in the company at all times during the ownership test period. ● There must be persons who had rights to more than 50% of the company's dividends at all times during the ownership test period. ● There must be persons who had rights to more than 50% of the company's capital distributions at all times during the ownership test period. Division 166 modification to the same owner test Broadly, Division 166 modifies the way the rules in Division 166 apply to a widely held company by making it easier for the company to apply the rules. If the company has maintained the same owners as between certain points of time, it does not need to prove it has maintained the same owners throughout the periods in between. In certain cases, special concessional tracing rules deem entities to hold voting, dividend or capital stakes in the company so that the company does not have to trace through to the ultimate beneficial owners of the stakes. Section 166-5 specifically provides the following modification: (1) This Subdivision modifies the way Subdivision 165-A applies to a company that is: (a) A *widely held company at all times during the income year … The term "widely held company" is defined in subsection 995-1(1) to mean: (a) A company, *share in which (except shares that carry a right to a fixed rate of *dividend) are listed for quotation in the official list of an *approved stock exchange ... XYZ is listed on the ASX and is a widely held company for the purpose of Division 166. XYZ does not choose, pursuant to section 166-15, for Subdivision 166-A not to apply. Therefore, Subdivision 166-A applies to XYZ and modifies the operation of Subdivision 165-A. Subsections 166-5(2) and 166-5(3) contain the following modified rules ("Modified COT"): (1) The company's test period is the period consisting of the *loss year, the income year and any intervening year. (2) The company is taken to have met the conditions in section 165-12 (which is about the company maintaining the same owners) if there is *substantial continuity of ownership of the company as between the start of the *test period and: (a) The end of each income year in that period; and (b) The *end of each *corporate change in that period. The term "end" in relation to a "corporate change" is defined in subsection 995-1(1) to have the meaning given by section 166-175: (1) There is a corporate change in a company if: … (d) There is an issue of shares in the company that results in an increase of 20% or more in: (i) The issued share capital of the company; or (ii) The number of the company's shares on issue; (2) A corporate change ends: … (c) if paragraph (1)(d) applies (or paragraph (1)(e) applies because of paragraph (1)(d) - when the offer period for the issue of shares ends. Accordingly, a "corporate change" occurs for XYZ as there is an issue of shares in XYZ that results in an increase of more than 20% in the number of XYZ's shares on issue. In other words, XYZ is required to satisfy the Modified COT at each testing point described in the above section. For the purposes of the Modified COT, "substantial continuity of ownership" is defined in section 166-145 as follows: (1) There is substantial continuity of ownership of the company as between the start of the *test period and another time in the test period if (and only if) the conditions in this section are met. Voting power (2) There must be persons (none of them companies or trustees) who had *more than 50% of the voting power in the company at the start of the *test period. Also, those persons must have had *more than 50% of the voting power in the company immediately after the other time in the test period. Rights to dividends (3) There must be persons (none of them companies) who had rights to *more than 50% of the company's dividends at the start of the *test period. Also, those persons must have had rights to *more than 50% of the company's dividends immediately after the other time in the test period. Rights to capital distributions (4) There must be persons (none of them companies) who had rights to *more than 50% of the company's capital distribution at the start of the *test period. Also those persons must have had rights to *more than 50% of the company's capital distributions immediately after the other time in the test period. (5) To work out whether a condition in this section was satisfied at a time (the ownership test time), apply the alternative test for that condition. Note: For the alternative test, see subsections 165-150(2), 165-155(2) and 165-160(2). XYZ has only one class of shares that carry equal voting, dividend and capital distribution rights. XYZ will meet all three of the conditions in subsection 166-145 if the "voting power" condition is satisfied. Accordingly, the following analysis will only be in reference to the "voting power" condition in subsection 166-145(2). Subsection 165-150(2) in turn provides circumstances when persons (none of them companies or trustees) have "more than 50% of the voting power in the company": The alternative test (2) Applying the alternative test: if it is the case, or it is reasonable to assume, that there are persons (none of them companies or *trustees) who (between them) at a particular time control, or are able to control (whether directly, or indirectly through one or more interposed entities) the voting power in the company, those persons have more than 50% of the voting power in the company at that time. Subdivision 166-E provides concessional tracing rules which make it easier for a widely held entity to satisfy the tests in section 166-145. Subsection 166-225 provides: (1) This section modifies how the ownership tests in section 166-145 are applied to the tested company if: (a) a *voting stake that carries rights to less than 10% of the voting power in the company is held directly in the company ... (2) The tests are applied to the tested company as if, at the *ownership test time, a single notional entity: (a) directly controlled the voting power that is carried by each such *voting stake; and (b) had the right to receive, for its own benefit and directly: (i) any *dividends the tested company may pay in respect of such *dividend stake; and (ii) any distributions of capital of the tested com any in respect of each such *capital stake; and (c) were a person (other than a company). For all registered shareholdings carrying less than 10 % of voting power, the voting power is taken to be controlled by a single notional entity. The single notional entity is taken to be a person (other than a company), and is therefore regarded as an ultimate owner for the purpose of the alternative test. In this case, based on the share ownership of XYZ and the rights attached to those shares, it is observable that there are significant direct voting stakes of less than 10% of the voting power in XYZ at each of the relevant testing points. Accordingly, subsection 166-225(2) should apply to XYZ in respect of those direct voting stakes. Pursuant to the operation of subsection 166-255(2) in conjunction with subsection 165-150(2), the Modified COT is satisfied on the basis that the single notional entity is deemed to hold more than 50% of the voting power in XYZ at the relevant testing points. However, this is subject to the integrity provision in section 166-270, which applies to stakes taken to be held oy a single notional entity under the tracing rule relating to direct stakes of less than 10%. Section 166-270 provides: Minimum control of voting power (1) If: (a) The *ownership test time is after the start of the *test period; and (b) A single notional entity mentioned in section 166-270 has voting power in a company; and (c) The voting power that the entity test time is greater than the voting power that the entity had at the start of the test period; then the entity is taken to have voting power in the company at the ownership test time only to the extent that it had at the start of the test period. Given that the single notional entity has, at each of the testing points, greater than 50% of the voting power, section 166-270 will not cause the taxpayer to fail the Modified COT. The integrity provision in section 166-272 (Same Share Test) will have no impact on the outcome of the Modified COT for the taxpayer here. This outcome is consistent with paragraph 1.128 of the associated Explanatory Memorandum which states that the same share test does not apply in respect of stakes held by a single notional entity. Accordingly, the Acquisition of XYZ Securities by XYZ will not result in XYZ failing the same owners test in section 165-12 of the ITAA 1997. | Detailed Reasoning - Question 2 Summary: Yes. The capital gain under CGT event L3 upon LLC's entry into the XYZ income tax consolidated group will be reduced on the basis that all of the conditions in section 705-27 will be satisfied at the time of entry. | Detailed Reasoning - Detailed reasoning: Section 705-27 provides a reduction in tax cost setting amount that exceeds the market value of certain retained cost base assets as follows: (1) If: (a) A *retained cost base asset of the joining entity is a right to receive a specified amount of such Australian currency, covered by paragraph 705-25(5)(b); and (b) The market value of the asset is less than the *tax cost setting amount of the asset; and (c) The head company makes a *capital gain under *CGT event L3 (disregarding this subsection) as a result of the joining entity becoming a *subsidiary member of the group. Reduce the tax cost setting amount of the asset by the amount of the gain (but not below zero). The Explanatory Memorandum to Tax Laws Amendments (2010 Measures No 1) Bill 2010 provides the following explanation in relation to the interaction between section 705-27 and CGT event L3 in section 104-510: 5.291 A capital gain arises under CGT event L3 if the total tax cost setting amounts for all retained cost base assets exceed the joining entity's allowable cost amount (section 104-510). A capital loss cannot arise under CGT event L3. 5.292 Impaired debts qualify as retained cost base assets because they are a right to receive a specified amount of Australian currency. The tax cost setting amount of impaired debts is the face value of those debts at the joining time. 5.293 However, the face value of the debt is likely to be higher than the amount that could be recovered under the debt (that is, the market value of the debt). Therefore, the amount taken into account in working out the capital gain under CGT event L3 does not reflect the amount of the debt that is likely to be recovered. Consequently, the capital gain arising under CGT event L3 is overstated. 5.294 To overcome this concern, the tax cost setting amount of an asset of a joining entity will be reduced if: • the asset is a retained cost base that is a right to receive a specified amount of Australian currency covered by paragraph 705-25(5)(b); • the market value of the asset is less than the tax cost setting amount of the asset - the tax cost setting amount is the amount of Australian currency concerned; and • the head company makes a capital gain under CGT event L3 (disregarding this modification) as a result of the joining entity becoming a subsidiary member of the group. [Schedule 5, item 132, subsection 705-27(1)] 5.295 Where an asset satisfies these conditions, the tax cost setting amount of the asset will be reduced by the amount of the capital gain arising under CGT event L3, but not below zero. [Schedule 5, item 132, subsection 705-27(1)] 5.296 As the tax cost setting amount of the asset is reduced, the capital gain arising under CGT event L3 will also be reduced by an equivalent amount (paragraph 104-510(1)(b)). The amount of the capital gain might be reduced to nil. 5.297 However, the amount of the reduction under subsection 705-27(1) is reduced if: • the asset is an intra-group asset of the consolidated group; • the joining entity has been entitled to a deduction for an income year ending on or before the joining time because the market value of the asset is less than the specified amount of Australian currency; and • the accounting liability that corresponds to the asset has not been reduced under subsection 705-75(2) because it is an intra-group liability. [Schedule 5, item 132, subsection 705-27(2)] 5.298 In these circumstances, the amount of the reduction under subsection 705-27(1) is reduced by the amount of the deduction (but not below zero). [Schedule 5, item 132, subsection 705-27(2)] 5.299 An asset is an intra-group asset if the requirements in subsection 701-58(1) are satisfied in relation to the asset. Those requirements are, broadly: • the tax cost of the asset was set at the joining time because an entity became a subsidiary member the group; • ignoring the operation of the single entity rule (subsection 701-1(1)), the entity held the asset at the joining time; and • taking into account the operation of the single entity rule, the head company of the group did not hold the asset at the joining time. 5.300 If the tax cost setting amount of two or more of a joining entity's assets could be reduced under subsections 705-27(1) and (2), a reduction is made sequentially to the tax cost setting amounts of each of those assets [Schedule 5, item 132, paragraph 705-27(3)(a)] | Detailed Reasoning - Whether the New Loan Notes and Accrued Interest Receivable of the LLC are retained cost base assets under paragraph 705-25(5)(b): A retained cost base asset under paragraph 705-25(5)(b) is: (b) A right to receive a specified amount of such Australian currency, other than a right that is a marketable security within the meaning of section ?OB of the Income Tax Assessment Act 1936; Example A debt or a bank deposit The assets of LLC to be considered are the New Notes and Accrued Interest Receivable. Under subsection 708(7) of the ITAA 1936, a marketable security means a "traditional security" that is covered by paragraph (a) of security in section 159GP(1) of the ITAA 1936: Security means: (b) Stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security; A "traditional security" is defined in section 26BB of the ITAA 1936 as follows: Traditional security , in relation to a taxpayer, means a security held by the taxpayer that: (a) is or was acquired by the taxpayer after 10 May 1989; (b) either: (iii) does not have an eligible return; or (iv) has an eligible return, where: (A) the precise amount of the eligible return is able to be ascertained at the time of issue of the security; and (B) that amount is not greater than 1 1/2% of the amount calculated in accordance with the formula: Payments x Term Where: Payments is the amount of the payment or of the sum of the payments (excluding any periodic interest) liable to be made under the security when held by any person; and Term is the number (including any fraction) of years in the term of the security. (c) Is not a prescribed security within the meaning of section 26C; and (d) Is not trading stock of the taxpayer. The term "eligible return" is defined in section 26BB to have the same meaning as in Division 16E. According to subsection 159GP(3) in Division 16E, a security has an eligible return if it is reasonably likely at the time of issue, having regard to the terms of the security that the sum of all payments under the security (other than "periodic interest”); will exceed the issue price of the security. Under the New Note Deed Poll ("the Deed") the Issuer may, in its discretion, on any Interest Payment Date defer the payment of any amount of the interest until the next Interest Payment Date. Interest is cumulative and continues to accrue if there is optional deferral of interest. Having regard to the terms of the Deed, the Commissioner is of the view that it is reasonably likely that the sum of all payments under the New Notes (other than "periodic interest") will exceed the issue price of the notes. As such, the New Notes are not traditional securities and therefore are not marketable .securities. They are retained cost base assets under paragraph 705-25(5)(b). Similarly, the Accrued Interest Receivable on the New Notes will also not be marketable securities and will be retained cost base assets under paragraph 705-25(5)(b). This outcome is consistent with ATO lD 2005/20. | Detailed Reasoning - The market value of the asset is less than the tax cost setting amount of the asset: Section 705-25 states what the tax cost setting amount is for a retained cost base asset. In particular, subsection 705-25(2) provides that if the retained cost base asset is a right to receive a specified amount of such Australian currency other than a marketable security, its tax cost setting amount is equal to the amount of the Australian currency concerned. The aggregate market value of the New Notes and Accrued Interest Receivable is less than the tax cost setting amount of the New Notes and the tax cost setting amount of the Accrued Interest Receivable pursuant to section 705-25. The head company makes a capital gain under CGT event L3 (disregarding subsection 705-27(1)) as a result of the joining entity becoming a subsidiary member of the group Section 104-510 provides circumstances in which CGT event L3 is triggered: (1) CGT event L3 happens if: (a) An entity becomes *a subsidiary member of a *consolidated group or a *MEC group; and (b) The sum of the *tax cost setting amounts for all *retained cost base assets that are taken into account under paragraph 705-35(1)(b) in working out the tax cost setting amount of each reset cost base asset of the entity exceeds the group's *allocable cost amount for the entity. (2) The time of the event is just after the entity becomes a *subsidiary member of the group. (3) For the head company core purposes mentioned in subsection 701-1(2), the *head company makes a capital gain equal to the excess. The tax cost setting amount for the New Notes, Accrued Interest Receivable and cash exceeds the group's allowable cost amount. Therefore, disregarding the operation of section 705-27, a capital gain of approximately $X would arise under CGT event L3. Accordingly, as all three conditions of subsection 705-27(1) are met, the tax cost setting amount of the New Notes and Accrued Interest Receivable is to be reduced by the amount of the gain. The capital gain that arises under CGT event L3 is reduced to nil. | Detailed Reasoning - Subsection 705-27(2): Subsection 705-27(2) provides: If: (a) The requirements in subsection 701-58(1) (intra-group assets) are satisfied in relation to the asset; and (b) The joining entity has been entitled to a deduction for an income year ending on or before the joining time because of the *market value of the asset being less than the specified amount mentioned in paragraph (1)(a); and (c) The accounting liability that corresponds to the asset has not been reduced under subsection 705-75(2); Reduce the amount of the reduction under subsection (1) by the amount of the deduction (but not below zero). LLC (or XYZ and the XYZ Trust as partners of LLC) has not been entitled to a deduction for an income year ending on or before the joining because the market value of the asset being less than the specified amount. Accordingly, no adjustment needs to be made pursuant to subsection 705- 27(2). | Summary: No. The New Notes and Accrued Interest Receivable between XYZ and LLC are not forgiven for the purposes of Division 245 of the ITAA 1997 upon LLC joining XYZ income tax consolidated group. | Detailed Reasoning - Detailed reasoning: Broadly, when a creditor forgives a commercial debt you owe, you make a gain. This is usually not included in your assessable income. Instead, Division 245 of the ITAA 1997 offsets the forgiven amount against amounts that could otherwise reduce your taxable income in the same or a later income year. | Detailed Reasoning - Is there a commercial debt?: Section 245-10 specifically provides the circumstances in which the division applies: Subdivisions 245-C to 245-G apply to a debt of yours 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, 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; (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 paragraph 8-12(a),(b) and (c)) that has the effect of preventing a deduction. The New Notes meet the requirement of subsection 245-1O(c) as the taxpayer has advised that the interest on the New Notes could have been deducted by XYZ were it not restricted by the thin capitalisation provisions in Division 820. Accordingly, the New Notes and Accrued Interest Receivable should be considered a "commercial debt" for the purposes of Division 245. | Detailed Reasoning - Is there a forgiveness of a debt?: Section 245-35 provides what constitutes forgiveness of a debt: 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 limitation, without the debt been paid. In the context of the New Notes, XYZ is the debtor because it owes LLC the face value of the New Notes, In paragraph 3 of Taxation Determination TD 2004/17 Income tax: does the payment of a 'commercial debt' by a guarantor, pursuant to a pre-existing guarantee, constitute forgiveness of the debt under section 245-35 of Schedule 2C of the Income Tax Assessment Act 1936? , it states that '[t]he Macquarie Dictionary of Law defines a "release" as "the relinquishment of a legal right claim against" another, and "waiver" as "the intentional renunciation of some legal right or immunity. XYZ retains the legal obligation to honour the New Notes and the Accrued Interest Receivable. lt follows from the above that the New Notes and Accrued Interest Receivable should not be considered to be forgiven under subsection 245-35(a). The consolidation of LLC would have no impact on this outcome on the basis that the debt obligation continues to stand legally. Consolidation is merely a statutory fiction for certain taxation purposes. Similarly, subsection 245-25(b) should not apply as LLC will continue to be legally entitled to sue for the recovery of the New Notes and Accrued Interest Receivable post consolidation. There are other circumstances prescribed in Division 245 which give rise to forgiveness of debt including circumstances involving an assignment of the debt (section 245-36) and the subscription of shares to enable payment of the debt (section 245-37). Neither of these circumstances are applicable because (i) there is no agreement between the creditor, LLC and the debtor, XYZ, to assign the New Notes or Accrued Interest Receivable to a new creditor; and (ii) the subscription for shares in XYZ is settled by the transfer of the XYZ Securities to XYZ and not related to the repayment of the New Notes or the Accrued Interest Receivable. Similarly, section 245-40 is not triggered as none of the conditions are satisfied. | Detailed Reasoning - Is there in substance debt forgiveness?: Section 245-45 provides the operative rules if forgiveness involves an arrangement: (1) If: (a) The debtor and creditor in relation to a debt enter into an *arrangement; and (b) Under the arrangement, the debt’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); The term "arrangement" is defined in subsection 995-1(1) as follows: Arrangement means any arrangement, agreement, understanding, promise or undertaking whether express, or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. XYZ:Js obligation to pay the debt does not cease at a future time. Accordingly, section 245-45 does not apply. This outcome is consistent with the Original Explanatory Memorandum to the Taxation Law Amendment Bill (NO. 2) 1996 which provides the underlying rationale for the in substance forgiveness provision: In substance forgiveness 6.21 Debts will be taken to be forgiven where a debtor is effectively released from the obligation to pay the debt notwithstanding the existence of arrangements which imply that the debt remains on foot. 6.22 Under some arrangements, the debtor's obligation to pay the debt may not cease immediately but at some future time. Nevertheless, the debt will be treated as forgiven immediately if the debtor and creditor are not acting at arm's length and they agree either that the debtor will not have to pay any consideration for the concession granted by the creditor or merely a token amount. [Subsection 245-35(3)] 6.23 A debt which is treated as forgiven because of such an arrangement would not be subject to the debt forgiveness provisions again when the debt is actually forgiven. To have the provisions apply upon actual forgiveness would result in double taxing of the debtor on the same debt. [subsection 245-35(3)] Based on the above analysis, the New Notes and the Accrued Interest Receivable are not considered to be forgiven for the purposes of Division 245.