Issue
Is a debt on which no interest is paid or payable a 'commercial debt' under section 245-25 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) if, had interest been payable, that interest would have been an allowable deduction to the debtor?
Decision
Yes. The debt is a commercial debt pursuant to subsection 245-25(3) of Schedule 2C to the ITAA 1936.
Facts
Debtor required short-term funds to finance its working capital requirements and for this purpose drew a finance bill (the bill) on the acceptor (Creditor).
Upon maturity of the bill, the Debtor only repaid part of the face value of the bill.
After 27 June 1996, the Creditor was deemed to have forgiven the unpaid balance of the bill pursuant to a creditor's deed of arrangement.
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.
No interest is payable on the bill drawn by the Debtor. Instead, the Debtor is liable to pay the discount on the bill, which is the difference between the funding it actually receives and the face value of the bill which Debtor repays on its maturity.
Had interest been paid or payable by the Debtor in respect of the debt it would have been deductible to the Debtor. Accordingly, the debt is a commercial debt as defined in subsection 245-25(3) of Schedule 2C to the ITAA 1936.