Issue
Where a creditor forgives a number of commercial debts and there is no agreement to allocate lump sum consideration paid by the debtor for the debts forgiven, does section 245-65 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) provide for allocation of the consideration amongst the debts?
Decision
No. Section 245-65 of Schedule 2C to the ITAA 1936 does not provide for allocation of consideration amongst debts. In the absence of an agreement between the debtor and creditor, the allocation of consideration amongst debts is to be made based upon common law principles, before section 245-65 of Schedule 2C to the ITAA 1936 is applied.
Facts
Several commercial debts, for the purposes of section 245-25 of Schedule 2C to the ITAA 1936, existed between a debtor and creditor.
The debts were not incurred under an established line of credit.
Parts of the debts represented outstanding accrued interest.
After 27 June 1996, each of the debts was forgiven by the creditor under a single deed of release.
The deed of release was drafted by reference to the total amount of debts owing by the debtor to the creditor, which provided that the debtor pay a specified lump sum amount, that is, that the remainder of the total amount owing would be forgiven.
There was no pre-existing agreement between the debtor and the creditor that operated to allocate the lump sum payment amongst the debts.
Reasons for Decision
Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C applies where a forgiveness of a commercial debt occurs after 27 June 1996.
The deed of release constitutes the forgiveness of the outstanding amount of each debt for the purposes of subsection 245-35(1) of Schedule 2C to the ITAA 1936.
To determine the gross forgiven amount of each debt, it is necessary to allocate the lump sum amount as consideration in respect of each debt.
Section 245-65 of Schedule 2C to the ITAA 1936 specifies the consideration in respect of the forgiveness of a debt but does not allocate lump sum consideration between multiple debts.
To determine the allocation of consideration amongst debts, regard is firstly to be had to the agreement that effects the relevant forgiveness. The relevant agreement does not stipulate a basis for allocation of the consideration paid.
Secondly, regard is then to be had to any pre-existing agreement between the debtor and creditor as to the allocation of consideration amongst the debts. In this case no such pre-existing agreement exists.
Accordingly, the consideration is to be allocated based upon common law principles.
Based upon the High Court decision in Falk v. Haugh (1935) 53 CLR 163 at 173 the lump sum amount is firstly to be applied to the outstanding amounts of interest owing in respect of each debt.
The remaining amount of lump sum is then to be applied as consideration in respect of the remaining amounts of debts, based upon the date that each debt was incurred.
Refer Sibbles and Anor v. Highfern Proprietary Ltd (1987) 164 CLR 214 at 222 and Devaynes v. Noble (Clayton's Case) (1816) 1 Mer 572; (1816) 35 ER 781. That is, the consideration is to be fully applied to the oldest debt remaining and then successively applied to the next oldest debt.