Private ruling: Commercial debt forgiveness
Date of advice: 16 March 2026
Published: 29 June 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the forgiveness of the trade debt, for which a prior deduction was claimed, constitute assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Does the forgiveness of the trade debt, for which a prior deduction was claimed, constitute assessable recoupments under section 20-20 of the ITAA 1997? | A2: No. | Q3: Is the forgiveness of the shareholder loan debt subject to the Commercial Debt Forgiveness (CDF) rules in Division 245 of the ITAA 1997? | A3: Yes. | Q4: Is the payment paid by the former owners to clear pre-sale liabilities subject to the CDF rules in Division 245 of the ITAA 1997? | A4: No.

Relevant facts and circumstances: 1. Person A acquired 100% of the shares in Company B from the previous shareholders on a specified date. 2. A Share Transfer Agreement was entered into on a specified date. A clause of the Share Transfer Agreement details that outstanding pre-transfer debts remained the responsibility of the former shareholders. 3. Company B had unutilised carry forward losses for the previous income year. You provided us with the amount of the carry forward losses. 4. Company B reports income tax on an accrual's basis. 5. The same business was conducted by both the previous and current owners. Trade debt 6. A debt (transaction 1) owed to the former shareholders was waived on 31 December 2024 via a credit note. You provided us the amount of the debt. 7. Transaction 1 was for food purchases which was previously claimed as a deductible expense by Company B. Shareholder loan 8. Company B owed money for loans (transaction 2) from the previous shareholders. You provided us with details of the loan amount. 9. Transaction 2 was used for business activities to commence the business. 10. Transaction 2 was formally forgiven as part of the share transfer settlement on a specified date. Pre-sale liabilities 11. The former owners were required to pay an indemnity payment (transaction 3) to clear pre-sale liabilities, being for debts for the ATO and Superannuation. You provided us with the amount of the pre-sale liabilities. 12. Company B paid some of the liabilities using cash reserves, prior to receiving the payment for transaction 3 from the previous shareholders. 13. Company B received a cash payment of a specified amount for transaction 3 from the previous shareholders prior to the end of the ruling period. 14. The remaining payment due for transaction 3 remained unpaid at the end of the ruling period. 15. On a specified date an agreement was entered into for the repayment of the remaining amount owing to be paid weekly over a year. 16. The discharge of the ATO and Superannuation liabilities was paid by Company A to the ATO and Superannuation entities. The payment was made from the funds received by the former shareholders. The payment was not documented as a formal share subscription.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 20-20(3) | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 Division 245 | Income Tax Assessment Act 1997 section 245-10

Reasons for decision: Summary: Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997 . | Detailed Reasoning - Ordinary income: Subsection 6-5(2) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Gross income from everyday business activities, including income from sales, is ordinary income for the purposes of section 6-5. The Full Federal Court in F.C. of T. v. Cooke and Sherden 80 ATC 4140 stated: If a taxpayer receives a benefit which cannot be turned to pecuniary account, he has not received income as that term is understood according to ordinary concepts and usages. | Detailed Reasoning - Assessable recoupment: Subsection 20-20(3) provides that an amount received by you as a 'recoupment' of a loss or outgoing, except by way of insurance or indemnity, is an 'assessable recoupment' if you can deduct the loss or outgoing because of a provision listed in the table in section 20-30. | Detailed Reasoning - Commercial debt forgiveness: The commercial debt forgiveness rules set out in former Division 245 in Schedule 2C of the ITAA 1936 were largely reproduced in the current Division 245 pursuant to the Tax Laws Amendment (Transfer of Provisions) Act 2010, which continues the rewriting of the ITAA 1936, to reflect current drafting styles without changing original ideas and meanings unless expressly provided. Division 245 applies when a commercial debt (or part of a commercial debt) is forgiven from the 2010-11 income year onwards. | Detailed Reasoning - Commercial debt: Section 245-10 provides 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 8-1(2)(a), (b) and (c)) of the ITAA 1997 that has the effect of preventing a deduction. To determine whether a commercial debt exists it is necessary to consider the borrower's purpose and not that of the lender ( Federal Commissioner of Taxation v Tasman Group Services Pty Ltd 2009 ATC). If the purpose of the borrowing means that if interest had been payable on the loan, it would have been deductible to the borrower, the loan constitutes a commercial debt. | Detailed Reasoning - Forgiveness of a debt: A debt is forgiven under section 245-35 when a debtor is released or waived from their obligation to pay the debt or the period within which the creditor is entitled to sue for recovery of the debt ends. Section 245-35 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. | Detailed Reasoning - Question 1 & 2: Transaction 1 was for business expenses paid claimed as an expense by Company B for the purpose of carrying on its business or for the purpose of gaining assessable income. Company B did not receive money or property when the trade debt loan was forgiven. Section 6-5 does not apply as the forgiven amount is not money or property, therefore the forgiven amount is not assessable under section 6-5. Section 20-20 does not apply as no recoupment was received by Company B. | Detailed Reasoning - Question 3: Transaction 2 was for a loan owned to the previous shareholders of Company B for the purpose of carrying on its business and for the purpose of gaining assessable income. Therefore, if interest were charged and payable on the loan it would be deductible under section 8-1. Accordingly, the loan is a commercial debt and falls within the provisions of Division 245. | Detailed Reasoning - Question 4: Transaction 3 was for repayment of pre-sale liabilities, being for tax and superannuation liabilities required to be paid by Company B for the purpose of carrying on its business. Division 245 requires that that a debt is being released, waived or extinguished, no debt is being forgiven between Company B and the former shareholders. Therefore, the repayment is not a commercial debt forgiveness under Division 245.