Issue
Where a commercial debt is extinguished by a debtor giving property other than cash, is the debt forgiven for the purposes of subsection 245-35(1) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. A debt is forgiven under subsection 245-35(1) of Schedule 2C to the ITAA 1936 where the debtor's obligation to pay the debt is extinguished other than by payment of the whole of the debt in cash.
Facts
After 27 June 1996, a debtor extinguished a commercial debt by providing a creditor with property other than cash. The market value of the property at the time of the forgiveness equalled the notional value of the debt under section 245-55 of Schedule 2C to the ITAA 1936.
Reasons for Decision
Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C to the ITAA 1936 applies where the forgiveness of a commercial debt occurs after 27 June 1996.
Subsection 245-35(1) of Schedule 2C to the ITAA 1936 specifies that a debt is forgiven if the debtor's obligation to pay the debt is released or waived, or is otherwise extinguished.
The property given to the creditor is consideration under paragraph 245-65(1)(b) of Schedule 2C to the ITAA 1936.
As the notional value of the debt equals the consideration in respect of the debt at the time of the forgiveness, paragraph 245-75(2)(b) of Schedule 2C to the ITAA 1936 provides that there is no forgiven amount in respect of the debt. Therefore, Subdivisions 245-D to 245-G of Schedule 2C to the ITAA 1936 have no application to that debt.