Commercial debt forgiveness - consideration paid or given - calculation of gross forgiven amount of debt

Where consideration is paid or given for the forgiveness of a commercial debt is the 'gross forgiven amount' for the purposes of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) calculated by reference to the consideration paid or given?

Yes. Subsection 245-75(2) of Schedule 2C to the ITAA 1936 provides that where consideration is paid or given for the forgiveness of a commercial debt, the gross forgiven amount of the debt is equal to the amount by which the notional value of the debt at the time of the forgiveness exceeds the consideration.

Debtor entered into an arm's length loan agreement with a financial institution (Lender). The loan constituted a commercial debt.

After 27 June 1996, for commercial reasons, Lender agreed to forgive the balance of the debt payable in consideration of Debtor giving shares with a market value of $50 000 at the time of the forgiveness.

The notional value of the debt for the purposes of section 245-55 of Schedule 2C to the ITAA 1936 at the time of the forgiveness was $450 000.

Subsection 245-75(2) of Schedule 2C to the ITAA 1936 relevantly provides that: 'Subject to subsection (3), if any consideration is paid or given, or taken to be paid or given, in respect of the forgiveness of the debt: (a) where the notional value of the debt at the time when the debt was forgiven exceeds the consideration - the gross forgiven amount of the debt is an amount equal to the excess...'

The notional value of the debt at the time when the debt was forgiven was an amount of $450 000, determined in accordance with section 245-55 of Schedule 2C to the ITAA 1936.

The shares that Debtor gave to Lender constitute consideration for the forgiveness of the debt in accordance with paragraph 245-65(1)(b) of Schedule 2C to the ITAA 1936. The consideration is the market value of the shares at the time of the forgiveness ($50 000).

In accordance with paragraph 245-75(2)(a) of Schedule 2C to the ITAA 1936, the gross forgiven amount of the debt forgiven by Lender is equal to the amount by which the notional value of the debt when the debt was forgiven exceeds the consideration paid, being an amount of $400 000 ($450 000 less $50 000).