Edited version of private ruling

Authorisation Number: 1011466037080

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Ruling

Subject: Debt forgiveness and debt parking

Question 1

Does the assignment from existing creditors to a new creditor, comprising a company X to be owned by A and B, of the right to receive payment of debts due from Y constitute the forgiveness of commercial debts under section 245-35(1) of Schedule 2C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Alternatively, does the assignment of debts give rise to a deemed forgiveness of those debts under the debt parking rules pursuant to section 245-35(4) of Schedule 2C of ITAA 1936?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The following description of the scheme is based on information provided by the Applicant.

Y is currently owned by C and D.

Administrators and Receivers were appointed to Y.

A and B have made an offer to the Administrator to take control over Y. The A and B proposal has been accepted by the Administrator.

The proposal is for A and B to take ownership of the majority of the existing shares of Y and the outstanding debts of Y.

The A and B are negotiating with the existing creditors and their representatives to have the debts assigned to X, a company that will be incorporated and owned by A and B upon incorporation.

Under the proposal X will step into the shoes of the existing creditors of Y and maintain the benefits and obligations that would otherwise fall to the existing creditors of Y in relation to the assigned debts. A and B propose to acquire the assigned debts from the existing creditors for the following reasons:

· the right of A and B to receive payment of Y's debts

· to the extent that Y is unable to repay its debts, A and B will have rights of priority for repayment of debt over the rights of other shareholders and lower ranking creditors

· A and B will have recourse to the security to enforce its rights as creditor as against the rights of shareholders and lower ranking creditors

· in the event Y runs into financial difficulty in the future, A and B, as a creditor. will have greater participation rights in any future company recapitalisation proposal, in its capacity as a creditor (over and above those as shareholder), and

· A and B will have flexibility to enable cash to be repatriated to A and B other than being dependant on the availability of Y profits from which to be paid dividends.

Y is funded by a mixture of secured and unsecured debt.

Secured debt

Y has funding from a syndicate of lenders, secured by a combination of fixed and floating charges over the company's assets and a share mortgage over the shares C holds in Y. The debt funding is provided under the Senior Syndicated Facility Agreement (senior debt) and the Subscription Agreement (mezzanine debt).

Unsecured debts

The unsecured debts include an amount due to A.

A loan agreement between C and D, as lenders, and Y is referred to in the agreement as the C Loan.

Proposed refinancing

The Administrators are giving consideration to an offer from A and B to recapitalise Y.

A varied Deed of Company Arrangement, the Y Varied DOCA will be put before Y's creditors for their consideration.

Under the Y Varied DOCA, A and B will form a special purpose company, X. Under the Y Varied DOCA the existing equity will be restructured. 100% of the shareholding in Y will be transferred to X. In addition, the recapitalization will involve the issue of new shares for the benefit of the creditors.

X will acquire the shares in Y after the debt assignment has occurred.

Under the Y Varied DOCA the existing debts of Y will be restructured. The restructure of the debt will, amongst other things, include an assignment of the relevant secured debts, C debts and remaining unsecured debts.

The assignment of the debts will be carried out under the relevant agreements.

The assignment of the debt under the relevant agreements by the relevant creditors to X is a legal debt assignment.

The proposed assignment of existing debts from the secured creditors, C and the remaining unsecured creditors to X will be carried out in accordance with the relevant agreements.

The debts assigned to X will not be released, waived or extinguished. X will assume the benefits and obligations of the current creditors in respect of the assigned debt. The assigned debts will continue in force.

X does not intention of releasing Y from its obligations to repay the debt. X intends to seek full repayment of the debts assigned under the relevant agreements.

X will be a company incorporated under the Corporations Act 2001.

X will not be a partner of Y or in a partnership in which Y is a partner at the time of the assignment.

X will not be a trustee of a trust at the time of the assignment.

A and B currently do not have a majority voting interest in or significant influence over Y.

Y does not have a majority voting interest in or significant influence over either X, once incorporated, or A and B.

X and A and B do not have a majority voting interest in or influence over C

It is proposed that the Debt Assignment will take place prior to the recapitalisation.

The recapitalisation of Y will occur through a court ordered process under the Y Varied DOCA.

Y does not have any decision making authority, with the Administrator assuming this responsibility.

The Y Varied DOCA will be voted on by creditors and if adopted ratified by Y.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 318

Income Tax Assessment Act 1936 Subsection 318(2)

Income Tax Assessment Act 1936 Schedule 2C

Income Tax Assessment Act 1936 Subsection 245-10(1) of Schedule 2C

Income Tax Assessment Act 1936 Section 245-35 of Schedule 2C

Income Tax Assessment Act 1936 Subsection 245-35(1) of Schedule 2C

Income Tax Assessment Act 1936 Subsection 245-35(4) of Schedule 2C

Income Tax Assessment Act 1936 Subsection 245-35(5) of Schedule 2C

Income Tax Assessment Act 1936 Subsection 245-245(1) to Schedule 2C

Does Part IVA apply to this ruling?

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 fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Summary

In order for there to be debt forgiveness, the transaction must fall into one of the categories under section 245-35 of Schedule 2C to the ITAA 1936. For the purposes of this ruling that is, when an obligation to pay debt is forgiven or when there is debt parking.

Under the scheme described in the private ruling application and subsequent submissions, the obligation to pay the debt will not be forgiven at the time of the debt assignment or at any time and the debt parking provisions do not apply.

Question 1

Forgiveness of debt

For the commercial debt forgiveness rules to apply, subsection 245-10(1) of Schedule 2C to the ITAA 1936 provides that there must be forgiveness of a commercial debt.

Section 245-35 of Schedule 2C to the ITAA 1936 provides that forgiveness can occur for the purposes of Schedule 2C to the ITAA 1936 in various ways. For present purposes the relevant subsections for consideration are subsections (1) and (5) thereof.

Firstly, subsection 245-35(1) of Schedule 2C to the ITAA 1936 states:

a debt is forgiven if the debtors obligation to pay the debt is released or waived, or is otherwise extinguished.

The terms released and waived used in subsection 245-35(1) of Schedule 2C to the ITAA 1936 are not defined for the purposes of Schedule 2C to the ITAA 1936. The Macquarie Dictionary of Law defines release as the relinquishment of a legal right or claim against another, and waiver as the intentional renunciation of some legal right or immunity.

In Taxation Determination TD 2004/17, the Commissioner has commented, in the context of Schedule 2C, both terms are considered to encompass circumstances where the debtor has been afforded relief from repaying the debt.

The mere repayment of a debt is not considered to be a release or waiver as no relief is afforded to the debtor.

However, the repayment of a debt extinguishes the debt under subsection 245-35(1) of Schedule 2C to the ITAA 1936, unless the repayment is made in cash.

Subsection 245-245(1) of Schedule 2C to the ITAA 1936 defines the term extinguished as:

in relation to debt, does not include payment of the whole of the debt in cash.

The term cash is undefined in Schedule 2C to the ITAA 1936.

The assignment of the relevant debts will be affected under the relevant agreements.

There will a legal assignment of the relevant debt from the current creditors to X under the relevant agreements. The rights and obligations in respect to the debts to be assigned will pass from the current creditors to X.

In this instance there has been no release or extinguishment of Y's obligation to repay the loan within subsection 245-35(1) of Schedule 2C to the ITAA 1936. By contrast the obligation to repay the loans remains on hand, albeit to a new creditor being X. Those monies remain due and payable under the relevant loan agreements.

The new creditor, X, will acquire the assigned debt for an amount to be agreed and acquire the right to receive payments under the debt. The Applicant provides that Y is liable to pay the full amount of debt to X. None of the assigned debt owed by Y will be reduced under the arrangement. Therefore, Subsection 245-35(1) of Schedule 2C to the ITAA 1936 does not apply to this arrangement.

Question 2

Debt Parking

The debt parking provisions contained in subsection 245-35 (4) of Schedule 2C to the ITAA 1936 where a creditor assigns its rights under a debt to a third party without the debtor's obligations under the debt being forgiven. It is possible for the debtor to be effectively released from its debt where, because of a relationship between the debtor and the assignee, the assignee would not seek to recover the debt. When a debt parking arrangement occurs, the debt forgiveness provisions apply as if the debtor had been forgiven instead of being assigned.

The debt parking provisions apply in accordance with subsection 245-35(4) of Schedule 2C to the ITAA 1936 if:

If:

(a) the creditor, in relation to a debt, assigns the right to receive payment of the debt to another person (the "new creditor"); and

(b) either:

i. the new creditor is an associate of the debtor; or

ii. the assignment occurred under an agreement or arrangement to which the new creditor and the debtor are parties; and

(c) the right to receive payment of the debt was not acquired by the new creditor in the ordinary course of trading on a securities market:

this Division has effect as if:

(d) the debtor had, at the time of the assignment, been forgiven a debt (the "notional debt") equal to the amount of the assigned debt; and

(e) the net forgiven amount of the notional debt were equal to the amount that would have been the net forgiven amount of the assigned debt if that debt had been forgiven instead of being assigned.

Assignment of Debt

The existing creditors will assign the relevant debts under the relevant agreements to the new creditor, X.

Associate of the debtor

Subsection 245-245(1) to Schedule 2C of the ITAA 1936 states that 'associate' has the meaning given by section 318 of the ITAA 1936. Subsection 318(2) of the ITAA 1936 specifies who will be an associate of a company.

The Applicant provides that there is currently no relationship or association between the Y (the debtor) and X (the new creditor), once incorporated as:

· X will not be a partner of Y or in a partnership in which Y is a partner at the time of the assignment.

· X will not be a trustee of a trust at the time of the assignment.

· A and B currently do not have a majority voting interest in or significant influence over Y.

· Y does not have a majority voting interest in or significant influence over either X, once incorporated, or A and B.

· X and A and B do not have a majority voting interest in or influence over C

It is proposed that the Debt Assignment will take place prior to the Recapitalisation.

Under a relevant agreement, there is provision for the assignment of debt and the transfer of 100% of the shareholding in Y to C and D. After the restructure of the existing debts under the relevant agreements the two parties will become associates. However, prior to the execution of the relevant agreements there is no associate relationship between A and B and X, once incorporated, and Y.

Agreement or Arrangement to which the new creditor and the debtor are parties

The debt parking provisions contained section 245-35(4) to Schedule 2C of the ITAA 1936 apply where is an assignment of debt to an entity who is not an associate of the debtor where the new creditor and the debtor are parties to the agreement or the arrangement.

The Applicant provides that:

· The proposal is put forward by the A and B which has been negotiated through discussion between A and B, the current creditors and the Administrator.

· The proposal will be voted on by creditors and if adopted ratified by Y.

· The assignment of a relevant debt will be affected under the relevant agreement. The relevant agreement will be approved by parties independent of Y (that is, the creditors of C). Y is not a party to the relevant agreement.

· The relevant agreement will be conditional on another relevant agreement being approved. The requirement for Y to provide consent to the assignment of the C debts will be removed under the relevant agreement.

· Y does not have any decision making authority, with the Administrator assuming this responsibility.

· The secured debt will be assigned through a relevant agreement provided for under the debt facility agreement. Y is not a party the assignment.

· The assignment of the unsecured debts will be effected under the relevant agreement. No separate deed of assignment will be entered into.

Under the relevant agreements, the creditors will assign the debt, being the relevant amounts owing by Y to the relevant creditors, to X. There will be a legal assignment of the debt under the relevant agreements. Y is the subject of the relevant agreements. Y does not have any decision making authority in respect to the relevant agreements. As Y is under administration the Administrator has assuming this responsibility. Y does not have any decision making authority over the recapitalisation as this will occur through a court ordered process under the relevant agreements. Y is the subject of the relevant agreements only and does not have a say in whether or not the debt will be assigned.

In this instance the 'new creditor', X, and the debtor, Y, are not parties to an agreement or arrangement under which the debt assignment will occur.

Ordinary course of trading on a securities market

The right to receive payment of the debt will not be acquired by the new creditor in the ordinary course of trading on the securities market. In this case, the right to receive payment of the debt will be acquired by the new creditor (X) during a recapitalisation and acquisition of a company.

Conclusion

X and Y are not associates and the assignment of the relevant debt will not occur under an agreement or arrangement to which both X and Y are parties. Therefore, the requirements for debt parking have not been satisfied and subsection 245-35(4) of Schedule 2C to the ITAA 1936 does not apply.

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