Tax Laws Amendment (2004 Measures No. 7) Act 2005 (41 of 2005)

Schedule 6   Consolidation

Part 4   Bad debts

Division 1   Main amendment

Income Tax Assessment Act 1997

5   At the end of Division 709

Add:

Subdivision 709-D - Deducting bad debts

Guide to Subdivision 709-D

709-200 What this Subdivision is about

An entity can deduct a bad debt that:

(a) has for a period been owed to a member of a consolidated group; and

(b) has for another period been owed to an entity that was not a member of that group;

only if each entity that has been owed the debt for such a period could have deducted the debt had it been written off as bad at the end of the period. This applies even if the debt is owed to the same entity for different periods.

Table of sections

Application and object

709-205 Application of this Subdivision

709-210 Object of this Subdivision

Limit on deduction of bad debt

709-215 Limit on deduction of bad debt

Application and object

709-205 Application of this Subdivision

(1) This Subdivision affects whether an entity (the claimant ) that is or has been a *member of a *consolidated group and writes off a debt, or part of a debt, as bad may deduct the debt or part if the conditions in subsection (2) exist.

(2) The conditions are that, in the time starting when the debt was incurred (whether to the claimant or another entity) and ending when the claimant wrote off the debt or part:

(a) the debt was owed to an entity (whether the claimant or another entity) for a period (a debt test period ) when the entity was a *member of a *consolidated group; and

(b) the debt was owed to an entity (whether the claimant or another entity) for a period (also a debt test period ) when the entity was a not a member of that group.

Note 1: The debt must have been owed to the claimant for at least one of the debt test periods for the claimant to have been able to write it off.

Note 2: One effect of section 701-1 (Single entity rule) is that a debt is taken to be owed to the head company of a consolidated group while the debt is owed to a subsidiary member of the group.

(3) Ignore section 701-5 (Entry history rule) and section 701-40 (Exit history rule) in identifying a debt test period.

Note: Subsection (3) does not affect sections 701-5 and 701-40 so far as they operate to treat the debt, or part of the debt, as having been included in the claimant's assessable income. That inclusion is generally a condition under section 25-35 for the claimant to be able to deduct the debt.

(4) This Subdivision does not apply in relation to a debt merely because it is assigned:

(a) from an entity that is a *member of a *consolidated group to an entity that is not a member of that group; or

(b) from an entity that is not a member of a consolidated group to an entity that is a member of a consolidated group; or

(c) from an entity that is a member of a consolidated group to an entity that is a member of another consolidated group.

This subsection has effect despite subsections (1) and (2).

Note: There is not an assignment of a debt from one entity to another merely because section 701-1 (Single entity rule) starts or ceases to apply in relation to the entities so that the debt ceases to be a debt owed to one entity and becomes a debt owed to the other entity.

709-210 Object of this Subdivision

The main object of this Subdivision is to ensure that the claimant can deduct the debt, or part of it, only if each entity that was owed the debt for a debt test period could have deducted the debt if it had been written off as bad at the end of the period.

Limit on deduction of bad debt

709-215 Limit on deduction of bad debt

(1) The claimant can deduct the debt, or part of the debt, if, and only if:

(a) section 8-1 or 25-35 permits the deduction (ignoring subsection 25-35(5) and the provisions mentioned in that subsection); and

(b) the condition in subsection (2) is met for each debt test period.

(2) The condition is that the entity that was owed the debt for the debt test period could have deducted the debt for an income year (the debt test income year ) starting and ending at the times identified in subsection (3) if:

(a) the entity had written off the debt as bad at the end of the period; and

(b) these provisions (the modified provisions ) had effect as described in this section:

(i) sections 165-123 and 165-126 (which are about conditions that must be met for a company to be able to deduct a bad debt);

(ii) sections 266-35, 266-85, 266-120, 266-160 and 267-25 in Schedule 2F to the Income Tax Assessment Act 1936 (which are about conditions that must be met for certain kinds of trusts to be able to deduct a bad debt);

(iii) other provisions of this Act so far as they relate to a section listed in subparagraph (i) or (ii); and

(c) these provisions did not apply:

(i) subsections 165-120(2) and (3);

(ii) section 267-65 in Schedule 2F to the Income Tax Assessment Act 1936.

Note 1: Some of the other provisions of this Act that relate to a section listed in subparagraph (2)(b)(i) are sections 165-120, 165-129 and 165-132 and Subdivision 166-C.

Note 2: Some of the other provisions of this Act that relate to a section listed in subparagraph (2)(b)(ii) are sections 266-40, 266-45, 266-90, 266-125, 266-165, 267-30, 267-35, 267-40 and 267-45 in Schedule 2F to the Income Tax Assessment Act 1936.

Debt test income year

(3) The table shows when the debt test income year starts and ends.

Continuity periods, ownership test periods and test periods

(4) For the purposes of subsection (2), the modified provisions have effect as if:

(a) the *first continuity period started at the start time shown in the table and ended at the start of the debt test income year; and

(b) the *second continuity period were the debt test income year or, for the purposes of section 165-123 and Subdivision 166-C defining periods by reference to the second continuity period, the period:

(i) starting at the start of the debt test income year; and

(ii) ending at the end time shown in the table; and

(c) each section listed in subparagraph (2)(b)(ii) specified that the test period identified in the section:

(i) started at the start time shown in the table; and

(ii) ended at the end time shown in the table.

(5) For the purposes of subsection (2), the modified provisions have effect as if section 267-25 in Schedule 2F to the Income Tax Assessment Act 1936 applied in relation to debts whether they were incurred in the income year or an earlier income year.

Test time for same business test under section 165-126

(6) For the purposes of subsection (2), the modified provisions have effect as if subsection 165-126(2) specified that the test time were the later of these times (or either of them if they are the same):

(a) the first time at which it is not practicable to show that the company will meet the conditions in section 165-123 (as modified by this section);

(b) the time just after the start of the debt test period.

Business at and just after the end of the debt test period

(7) If:

(a) the debt test period ends when the entity that was owed the debt for the period becomes a *member of a *consolidated group; and

(b) under the modified provisions, the *business that the entity carried on at or just after the end of the period is relevant to the question whether the entity could have deducted the debt as described in subsection (2);

those provisions have effect for the purposes of that subsection as if the entity carried on at those times the business it carried on just before the end of the period.