Private ruling: Business - Commercial debt forgiveness
Published: October 2013
Ruling period: 1 July 2012 to 30 June 2013

Ruling: Question and answer | Do the Commercial Debt Forgiveness provisions, under section 245-40 of the Income Tax Assessment Act 1997 , apply when a shareholder forgives a debt owed to them by a company out of natural love and affection? | No.

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 company was incorporated some years ago and is in the business of X. The sole director and shareholder was taxpayer 1. Taxpayer 1 sold a minority of shares in the company to their sibling, taxpayer 2. Taxpayer 2 was appointed a director of the company. Later Taxpayer 1 sold further shares in the company to taxpayer 2. The shareholdings in the company are now X% taxpayer 2 and y% taxpayer 1. Taxpayer 1 is only holding y% because of a licensing requirement for certain projects; however, once taxpayer 2 gains the necessary qualifications taxpayer 1 will transfer their remaining shares to taxpayer 2. Taxpayer 1 has relocated to start a new career. A debt was outstanding between the company and taxpayer 1. Taxpayer 1 forgave the debt owed to them by the company for reasons of natural love and affection towards the company director, their sibling taxpayer 2. Taxpayer 1 wants taxpayer 2 to be able to further develop an already successful business with a significant customer base without the requirement to repay the debt to taxpayer 1. The forgiveness of the debt is a gift from taxpayer 1 to taxpayer 2. Prior to the forgiveness of the debt the company was in a position to pay the debt back to taxpayer 1.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 245-40 | Income Tax Assessment Act 1997 subsection 245-40(e) Anti-avoidance rules | Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on.

Reasons for decision: Summary: Division 245 of the Income Tax Assessment Act 1997 (ITAA 1997) relates to the forgiveness of commercial debts. Section 245-40 of the ITAA 1997 lists specific circumstances where the forgiveness of debt will not come within the operation of Division 245 of the ITAA 1997. An exclusion to Division 245 applies, under section 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: Taxpayer 1, a shareholder, has forgiven the debt owed to them by the company, out of natural love and affection to assist his sibling, also a shareholder in the company to further develop the business. Taxpayer 1 intends in the future to sell their remaining shares in the company to taxpayer 2 because they have moved states to start a new career. There is no commercial debt forgiveness in this situation. Therefore, the commercial debt forgiveness provisions under section 245-40 of the ITAA 1997 will not apply.