Income Tax Assessment Act 1936

PART III - LIABILITY TO TAXATION  

Division 7A - Distributions to entities connected with a private company  

Subdivision B - Private company payments, loans and debt forgiveness are treated as dividends  

SECTION 109F   FORGIVEN DEBTS TREATED AS DIVIDENDS  

109F(1)   Forgiven debt treated as dividend.  

A private company is taken to pay a dividend to an entity at the end of the private company's year of income if all or part of a debt the entity owed the private company is forgiven in that year and either:

(a) the amount is forgiven when the entity is a shareholder in the private company, or an associate of such a shareholder; or

(b) a reasonable person would conclude (having regard to all the circumstances) that the amount is forgiven because the entity has been such a shareholder or associate at some time.

Note:

In some cases forgiving a debt does not give rise to a dividend. See section 109G .

109F(2)   Amount of dividend.  

The amount of the dividend equals the amount of debt forgiven, subject to section 109Y .

Note:

Section 109Y limits the total amount of dividends taken to have been paid by a private company under this Division to the company's distributable surplus.

109F(3)   When is a debt forgiven?  

An amount of a debt is forgiven for the purposes of this Division if and when the amount would be forgiven under section 245-35 or 245-37 of the Income Tax Assessment Act 1997 , assuming the amount were a debt to which Subdivisions 245-C to 245-G of that Act apply.

Note:

Division 245 of the Income Tax Assessment Act 1997 applies to forgiveness of certain commercial debts.

109F(4)   Discharge of debt by transfer of property is not forgiveness.  

Despite subsection (3), an amount of debt is not forgiven for the purposes of this Division if the obligation to pay the amount is discharged by a payment to the creditor consisting of a transfer of property.

Note:

Subsection 109C(4) explains how to work out the value of a payment consisting of a transfer of property.

109F(5)   Debt forgiveness by debt parking.  

An amount of debt an entity (the debtor ) owes a private company is also forgiven for the purposes of this Division if:

(a) the private company assigns the right to receive payment of the amount to another entity (the new creditor ) who is either:

(i) an associate of the debtor; or

(ii) a party to an arrangement with the debtor about the assignment; and

(b) a reasonable person would conclude (having regard to all the circumstances) that the new creditor will not exercise the assigned right.

109F(6)   Debt forgiveness by failure to rely on obligation to pay.  

An amount of debt an entity (the debtor ) owes a private company is also forgiven for the purposes of this Division if a reasonable person would conclude (having regard to all the circumstances) that the private company will not insist on the entity paying the amount or rely on the entity's obligation to pay the amount. (The amount is forgiven when a reasonable person would first reach that conclusion.)

109F(7)   Forgiveness of amalgamated loan debt.  

If a private company forgives an amount of debt resulting from a constituent loan taken into account in working out the amount of an amalgamated loan under subsection 109E(3) , the private company is taken to forgive the same amount of the debt resulting from the amalgamated loan.

109F(8)   This section operates on only the earliest debt forgiveness.  

If the same debt is forgiven for the purposes of this Division at different times under different provisions of this section, this section operates on the first forgiveness only.

Example:

Subsection (3) of this section provides that a debt is forgiven if it has not been paid by the time a statute of limitations prevents recovery of the debt. (It does this by applying paragraph 245-35(b) of the Income Tax Assessment Act 1997 .) The debt might already have been forgiven under subsection (6) of this section (because a reasonable person would have concluded earlier that the private company was not going to insist on payment). This section would apply to the forgiveness under subsection (6) but not the forgiveness under subsection (3).