Commercial debt forgiveness: commercial debt - 'exception provision' - section 51AD of the Income Tax Assessment Act 1936

Is a debt a commercial debt for the purposes of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) where interest paid in respect of the debt would be allowable as a deduction, apart from the operation of section 51AD of the ITAA 1936?

Yes. The debt is a commercial debt because section 51AD of the ITAA 1936 is an exception provision for the purposes of subsection 245-25(2) of Schedule 2C to the ITAA 1936.

Interest paid by a debtor in respect of a loan was not deductible solely because of the operation of section 51AD of the ITAA 1936.

After 27 June 1996 the lender forgave the loan.

Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C to the ITAA 1936 applies where a forgiveness of a commercial debt occurs after 27 June 1996.

The term 'commercial debt' is defined in section 245-25 of Schedule 2C to the ITAA 1936.

Paragraph 245-25(2)(b) of Schedule 2C to the ITAA 1936 provides that a debt is a 'commercial debt' if the whole or any part of interest paid or payable in respect of the debt would be allowable apart from the operation of an 'exception provision'.

The term 'exception provision' is defined in subsection 245-25(5) of Schedule 2C to the ITAA 1936 as follows: "exception provision" means a provision of this Act that has the effect of preventing a deduction that would otherwise be allowable, but does not include paragraphs 8-1(2)(a), (b) and (c) of the Income Tax Assessment Act 1997 (which prevent deductions for capital, private or domestic outgoings and for outgoings relating to exempt income).

Section 51AD of the ITAA 1936 is therefore an exception provision for the purposes of paragraph 245-25(2)(b) of Schedule 2C to the ITAA 1936

Accordingly, as the debt is a commercial debt, Schedule 2C to the ITAA 1936 applies to the forgiveness of the debt.