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Where a 'commercial debt' is forgiven and the debtor and creditor are companies under common ownership throughout the term of the debt, can the debtor and creditor enter into an agreement for the creditor to forgo an amount of capital loss or revenue deduction that does not exceed the 'provisional net forgiven amount' of the debt?

Yes. The debtor and creditor can enter into such an agreement pursuant to section 245-90 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936).

A company entered into an arm's length loan with another company for an amount of $16,500. The loan constituted a commercial debt.

Subsequently, after 27 June 1996, the creditor chose to forgive the balance of the loan payable, being $9,100, as the debtor was experiencing severe financial difficulties and was unable to repay the amount outstanding.

The gross forgiven amount of the debt was $9,100.

Throughout the term of the debt the debtor and creditor were under common ownership.

The creditor would have incurred a capital loss of $9,100 as a result of the forgiveness of the debt, apart from section 245-90 of Schedule 2C of the ITAA 1936. The provisional net forgiven amount of the debt, determined after applying section 245-85 of Schedule 2C to the ITAA 1936, was also $9100.

The public officer of the debtor and public officer of the creditor signed a written agreement before lodgment of either company's income tax return for the forgiveness year of income, whereby the creditor agreed to forgo $6,000 of its capital loss as a result of the forgiveness of the debt.

The commercial debt forgiveness provisions of section 245-85 of Schedule 2C to the ITAA 1936 determine reductions to the gross forgiven amount of any debt forgiven for the purpose of ascertaining the net forgiven amount of the debt or, where there is an agreement for the purposes of section 245-90 of Schedule 2C to the ITAA 1936, the provisional net forgiven amount of the debt (stated to be $9,100).

Section 245-90 of Schedule 2C to the ITAA 1936 applies if a debt owed by a company to another company is forgiven and throughout the term of the debt the companies were under common ownership.

Subsection 245-90(2) of Schedule 2C to the ITAA 1936 provides that, if apart from this subsection, the creditor would have incurred a capital loss as a result of the forgiveness of the debt, the debtor and creditor may agree that the creditor is to forgo so much of the loss as is stated and does not exceed the provisional net forgiven amount of the debt. The creditor would have incurred a capital loss of $9,100 which is also the provisional net forgiven amount.

The agreement between the debtor and creditor is a valid agreement pursuant to subsection 245-90(4) of Schedule 2C to the ITAA 1936.

The effect of the agreement is to reduce the capital loss of the creditor to $3,100. A further effect of the agreement is to reduce the provisional net forgiven amount of the debt by $6,000, resulting in a net forgiven amount of $3,100, pursuant to subparagraph 245-90(2)(b)(iii) of Schedule 2C to the ITAA 1936.