Private ruling: Trust - debt forgiveness and distributions
Published: June 2015
Ruling period: 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016

Ruling: Questions and answers | 1. Do the Commercial Debt Forgiveness provisions, under section 245-40 of the Income Tax Assessment Act 1997 , apply when the Specified Beneficiary forgives a debt owed to them by the trust out of love and affection? | No. | 2. Will a capital distribution from a debt forgiveness reserve of a discretionary trust be taxable in the hands of the beneficiary? | Not applicable.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The trust was established for the benefit of the Specified Beneficiary as well as other eligible beneficiaries which include the Specified Beneficiary's family and controlled entities. The trust holds the Specified Beneficiary's investments separate from their personal and business activities. Over many years the loan account has been built up, the Specified Beneficiary has lent money to the trust either through direct payments for the trust or through distributions which have been declared in the Specified Beneficiary's favour, but not fully withdrawn. This loan is an asset of the Specified Beneficiary and is potentially at risk in the event that the Specified Beneficiary is sued in relation to either personal actions or in relation to other actions or other business activities. There are no current legal actions against the Specified Beneficiary and it is not anticipated that there will be any legal action in the future; however, reducing the assets now, owned by the Specified Beneficiary will leave fewer assets at risk in the future. The Specified Beneficiary is considering forgiving some or all of the debt to the trust for love and affection for the other potential beneficiaries of the trust, and in order to protect the assets. Should the debt be forgiven, the amount of the forgiven debt would be allocated to a reserve in the accounts of the trust as part of the trust capital. In the event that the Specified Beneficiary or another beneficiary requires access to the funds, making up the forgiven loan, the trustee would declare a capital distribution from the debt forgiveness reserve. The amount of funds equal to the forgiven debt will be available for the use of the beneficiaries at some point in the future, if and when required. There are currently no plans to make any distributions from this debt forgiveness reserve in the near future, however you wish to ensure that distributions are possible if the need arises.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 245-10 | Income Tax Assessment Act 1997 S ection 245-40 | Income Tax Assessment Act 1997 subsection 245-40(e)

Reasons for decision: Summary: Division 245 of the Income Tax Assessment Act 1997 (ITAA 1997) is about forgiveness of commercial debts. Section 245-10 of the ITAA 1997 provides a debt is a commercial debt if the whole or any part of interest, or of an amount in the nature of interest, paid or payable in respect of the debt is or would be allowable as a deduction to the debtor. Section 245-40 of the ITAA 1997 lists specific circumstances where the forgiveness of a debt will not come within the operation of Division 245 of the ITAA 1997. An exclusion to Division 245 applies under subsection 245-40(e) of the ITAA 1997 where a commercial debt is forgiven for reasons of natural love and affection. | Detailed Reasoning - Application to your circumstances: The Specified Beneficiary is considering forgiving some or all of the debt to the trust for love and affection. As the Specified Beneficiary is considering forgiving the debt for love and affection the commercial debt forgiveness provisions under section 245-40 of the ITAA 1997 will not apply.