ATO Interpretative Decision
ATO ID 2014/33
Income Tax
Commercial debt forgiveness: gross forgiven amountThis ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where a creditor forgives a commercial debt as part of a settlement agreement and also pays the debtor an additional amount under the agreement that is assessable income of the debtor, does that amount reduce the gross forgiven amount of the debt under paragraph 245-85(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The additional amount will not reduce the gross forgiven amount of the debt under Paragraph 245-85(1)(a) of the ITAA 1997.
Facts
The taxpayer entered into a business arrangement with an unrelated entity. As part of the arrangement the taxpayer owed a commercial debt to the entity (the creditor).
The taxpayer threatened to sue the creditor for misrepresentation in relation to the business arrangement. The dispute was settled by formal agreement between the parties after 1 July 2010.
Under the agreement the creditor forgave the balance of the commercial debt owed by the taxpayer at the time of the agreement and also paid an additional settlement amount to the taxpayer.
The forgiven amount of debt was not assessable income of the taxpayer.
The additional settlement amount paid was assessable income of the taxpayer.
Neither party is in the business of moneylending.
Reasons for Decision
Division 245 of the ITAA 1997 applies to any commercial debt that has been forgiven after 1 July 2010.
Under paragraph 245-85(1)(a) of the ITAA 1997 the gross forgiven amount of a debt is reduced by:
any amount that, under a provision of this Act other than this Division, has been, or will be, included in your assessable income for any income year as a result of the forgiveness of the debt.
The phrase 'included in the assessable income for any income year as a result of the forgiveness of the debt' refers to a situation where the forgiveness of the debt results in an amount being included in your assessable income. There must be a causal connection between the forgiveness of the debt and the amount being included in assessable income.
In this case, the additional amount is separate from the debt forgiveness. The additional amount is a payment made as a result of the settlement agreement. The forgiveness of the debt is also part of the terms of the settlement agreement. The forgiveness of the debt did not cause the amount to be included in the assessable income of the taxpayer.
As the amount being included in the assessable income of the taxpayer did not 'result from the forgiveness of the debt', that amount does not fall within paragraph 245-85(1)(a) of the ITAA 1997.
Note: Section 245 of the ITAA 1997 replaced section 245-10 of Schedule C to the Income Tax Assessment Act 1936 (ITAA 1936). Although section 245 of the ITAA 1997 is effective from 1 July 2010, the provision is identical to section 245-10 of Schedule C to the ITAA 1936, which was effective from 27 June 1996.
Date of decision: 31 October 2014Year of income: Year ending 30 June 2015
Legislative References:
Income Tax Assessment Act 1997
Division 245
section 245-10
paragraph 245-85(1)(a)
Related Public Rulings (including Determinations)
Keywords
Commercial debt
Commercial debt forgiveness
Debt forgiven
Debt waivers
Gross forgiven amount
Date reviewed: 6 September 2017
ISSN: 1445-2782