Private ruling: Commercial debt forgiveness
Date of advice: 22 May 2026
Published: 3 August 2026
Ruling period: 1 July 20YY to 30 June 20YY
Date scheme commenced: DD MM 20YY

Ruling: Q1: Will the forgiveness of the loan owed by X to X be a forgiveness of commercial debt under Division 245 of the Income Tax Assessment Act 1997 ('ITAA 1997')? [1] | A1: Yes.

Relevant facts and circumstances: Background The Company was registered with ASIC on X XX XXXX The Lender has never worked for the Company. The Lender became an Australian resident for tax purposes in X XX. The Lender is not in the business of money lending. The sole director of the Company is X. X is the Lender's parent. The Loan Agreement A loan agreement between the Lender as the lender and the Company as the borrower has been entered into ('the Loan Agreement'). The funds were used by the Company to expand its operations into X. The intention was for the expansion to grow the Company and its profitability. The Company's financial position Over several years, the Company has incurred continual losses and is experiencing severe financial difficulty, with the expansion into X being the key reason behind the Company stretching its finances and leading to its eventual downfall. In the X income year, the Company confirmed with its creditors that the business could no longer continue and the main assets of the business were sold to a third party for X. With these funds, the Company was able to provide the Lender with his first and only partial loan repayment of X. This was reflected in the Company's financial statements. The Company has not paid any interest on the loan. The Company ceased all business activities in XX XXXX; no business activities were carried on from XX XXXX until X XX XXXX. The Company's financial statements demonstrate the following:... As at X XX XXXX, the Company had no recoverable assets and no operations. The Deed of Debt Forgiveness On X XX XXXX, the Lender and the Company entered into a Deed of Debt Forgiveness ('the Deed'). The relevant terms of the Deed are as follows:...

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | 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 245-40

Reasons for decision: Summary: Question 1 The forgiveness of the loan owed by the Company to the Lender under the Deed will be a forgiveness of commercial debt for the purposes of Division 245, and Subdivisions 245-C and 245-G will apply to the forgiveness. | Detailed Reasoning - Detailed reasoning: Division 245 Division 245 explains when a creditor forgives a commercial debt owed by a debtor. Section 245-10 provides that Subdivisions 245-C to 245-G apply to the following debts, referred to as commercial debts: (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)) that ahs the effect of preventing a deduction. Section 245-35 provides 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 credit 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. However, section 245-40 provides that Subdivisions 245-C to 245-G do not apply to a forgiveness of a debt if: (a) the debt is waived and the waiver constitutes a fringe benefit; or (b) the amount of the debt has been, or will be, included in the assessable income of the debtor in any income year; or (c) the forgiveness is effected under an Act relating to bankruptcy; or (d) the forgiveness is effected by will; or (e) the forgiveness is for reasons of natural love and affection; or (f) the debt is a tax-related liability or a civil penalty under Division 290 in Schedule 1 to the Taxation Administration Act 1953 (about penalties for promoters and implementers of tax avoidance schemes). Interest deductibility Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith ('TR 95/25') provides the Commissioner's view on the deductibility of a loss or outgoing comprising interest under section 8-1. Paragraph 3 of TR 95/25 states that the following general principles are relevant to the whether of whether interest is deductible under section 8-1: (a) The interest expense must have a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income and not be of a capital, private or domestic nature. (b) The character of interest on money borrowed is generally ascertained by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower. (c) A tracing of the borrowed money which establishes that it has been applied to an income producing use may demonstrate the relevant connection between the interest and the income producing activity. (d) A rigid tracing of the borrowed money will not always be necessary or appropriate. (e) Interest on borrowed funds will not be deductible simply because it can be said to preserve assessable income producing assets. (f) Interest on borrowings will not continue to be deductible if the borrowed funds cease to be employed in the borrower's business or income producing activity. (g) Interest will not be deductible to the extent to which it is private or domestic in nature, or is incurred in relation to the gaining or production of exempt income. Application to your circumstances Under the Loan Agreement entered into between the Company and the Lender, a debt is owed by the Company to the Lender. Clause 3 of the Loan Agreement provides that interest shall accrue on the debt from X. The Company has not paid any interest on the debt. Considering the general principles outlined in paragraph 3 of TR 95/25, the following points are noted: a. the funds advanced were used by the Company to expand its existing business operations into X, with the intention of growing the Company and its profitability; b. the funds have a direct connection with the Company's existing income producing operations and activities; and c. the funds advanced were not for used for a purpose that was private or domestic in nature, or for gaining or producing exempt income. Accordingly, if any interest was payable on the debt under the Loan Agreement, it would have been deductible under section 8-1. The debt will therefore be a commercial debt pursuant to subsection 245-10(b). On X XX XXXX, the Lender and the Company entered into the Deed whereby the Company's obligation to pay the debt was released by the Lender. Accordingly, there will be a forgiveness of a debt for the purposes of subsection 245-35(a). None of the exceptions in section 245-40 apply to the debt or its forgiveness. Accordingly, Subdivisions 245-C to 245-G will apply to the debt owed by the Company to the Lender under the Loan Agreement that was forgiven under the Deed. [1] All legislative references in this ruling are to the ITAA 1997 unless otherwise specified.