Commercial debt forgiveness - agreement to end debt obligation from a future time

Where pursuant to an agreement a debtor is released from an obligation to pay a debt with effect from the future time of a nominal payment, is the debt taken to be forgiven at the time of entering into the agreement for the purposes of subsection 245-35(3) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The debt is taken to be forgiven when the agreement is entered into for the purposes of subsection 245-35(3) of Schedule 2C to the ITAA 1936.

After 27 June 1996 Creditor formally released Debtor from its obligation to pay a debt of $2 million in consideration of an immediate payment of $100 000 and a further payment of $1 000 in two years time.

The debt was a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936.

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.

Subsection 245-35(3) of Schedule 2C to the ITAA 1936 provides that where a debtor and creditor enter into an agreement under which the debtor's obligation to pay the whole or part of the debt is to cease at a particular future time, the debt is taken to be forgiven when the agreement is entered into provided under paragraph 245-35(3)(c): '(c) the cessation of the obligation is to occur without the debtor incurring any financial or other obligation (other than an obligation that, having regard to the debtor's circumstances, is of a nominal or insignificant amount or kind);'

Having regard to Debtor's circumstances, the future $1 000 payment is nominal or insignificant and accordingly, a forgiveness of the debt occurred upon entering into the relevant agreement.