ATO Interpretative Decision
ATO ID 2004/981
Income Tax
Commercial debt forgiveness - Capital lossFOI status: may be released
This 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can a creditor that is an exempt entity, as defined by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), agree to forgo under section 245-90 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936), a capital loss as the result of the forgiveness of a commercial debt?
Decision
No. Any capital loss that the creditor otherwise would have made in respect of the forgiveness is disregarded under section 118-70 of the ITAA 1997 such that the creditor has no entitlement to a capital loss that it can forgo.
Facts
A commercial debt owed by a debtor company was forgiven on 22 March 2004.
The forgiveness meant that the debtor had a net forgiven amount for the purposes of Schedule 2C to the ITAA 1936.
The relevant creditor company was an exempt entity as defined in subsection 995-1(1) of the ITAA 1997.
The creditor and debtor were under common ownership at all relevant times.
The creditor would have made a capital loss in respect of the forgiveness that was disregarded by section 118-70 of the ITAA 1997.
The creditor and debtor want to make an agreement under subsection 245-90(2) of Schedule 2C to the ITAA 1936 in respect of the relevant forgiveness.
Reasons for Decision
The creditor and debtor satisfy the conditions in subsection 245-90(1) of Schedule 2C to the ITAA 1936.
However, in order to make an agreement to forgo all or part of a capital loss it is necessary that the creditor be otherwise entitled to that loss.
Whilst the creditor did incur a capital loss in respect of the forgiveness that capital loss is disregarded by section 118-70 of the ITAA 1997 such that the creditor has no entitlement to a capital loss that it can forgo.
The disregarding of a capital loss under section 118-70 of the ITAA 1997 is compulsory and not dependent on any choice being made by the creditor.
Date of decision: 9 December 2004Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1936
Schedule 2C
section 245-90
subsection 245-90(1)
subsection 245-90(2)
section 118-70
subsection 995-1(1)
Keywords
Capital losses
Commercial debt forgiveness
Common ownership
Net forgiven amount
ISSN: 1445-2782