CGT Determination Number 2

TD 2

Capital Gains: What are the CGT consequences for the lender (Creditor) when a debt is waived?

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FOI status:

may be releasedFOI number: I 1018900

1. The debt is an asset of the lender (paragraph 160A(a)). The debt is disposed of when the lender waives the debt (paragraph 160M(3)(b)). Whether a capital gain or loss occurs on the disposal of the debt depends firstly on the consideration received for the disposal and the appropriate cost base of the debt.

2. If the lender receives no consideration for the disposal of the debt, the lender is taken to have received an amount equal to the market value of the debt at the time of the disposal (paragraph 160ZD(2)(a)). The lender is also taken to receive market value on the disposal of the debt when the consideration is less than the market value of the debt (paragraph 160ZD(2)(c)). The market value of the debt at the time of its disposal is worked out as though the debt was not waived and was never intended to be waived (subsection 160ZD(2A)).

3. Generally, the cost base of the debt to the lender is the amount of the loan. The indexed cost base and the reduced cost base will be appropriately adjusted.

4. A capital loss is not allowed on the disposal of a non-listed personal-use asset (subsection 160Z(7)). Capital losses in respect of listed personal-use assets are treated in accordance with section 160ZQ. In some cases, a debt will be a personal-use asset of the lender (paragraph 160B(1)(b)). These are:

.

when the debt relates to an asset that was previously a personal-use asset of the

taxpayer; or

.

when the debt was not owed to the lender in the course of gaining or producing income or carrying on a business by the lender.

Example:

A father lends his son money to buy a house. If the son is later not able to repay the loan and the father waives the debt, the father is not allowed a capital loss for the disposal of the debt.

Commissioner of Taxation
10 September 1991

References

ATO references:
NO CGT Cell 3

Subject References:
Waiver of Debt - lender,
Personal use asset.

Legislative References:
ITAA 160A,
ITAA 160M(3)(b),
ITAA 160ZD(2),
ITAA 160Z(7),
ITAA 160B(1)(b)