Commercial debt forgiveness - what constitutes the forgiven debt if consideration is given in respect of the forgiveness?

Where consideration is paid or given for the forgiveness of a commercial debt, is the amount of the forgiven debt for the purposes of applying Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) the part of the debt no longer payable which has not been extinguished by the consideration?

No. Section 245-50 of Schedule 2C to the ITAA 1936 effectively provides that the relevant amount of the debt forgiven is the full amount of the debt owing before the forgiveness.

Debtor owed Creditor an amount of $500 000. This debt was a commercial debt within section 245-25 of Schedule 2C to the ITAA 1936.

After 27 June 1996, Creditor formally forgave the balance of the debt owing in consideration of Debtor paying an amount of $20 000.

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.

Section 245-50 of Schedule 2C to the ITAA 1936 states that: 'If any consideration is paid or given in respect of the forgiveness of a debt, the debt that is forgiven is taken to be: (a) the obligation that existed before the forgiveness to pay so much of the debt as is expressed, or is taken, to be forgiven; and (b) the obligation that existed before the forgiveness to pay any part of the debt to which paragraph (a) does not apply but which ceases to be payable as a result of the payment or giving of the consideration.'

The debt forgiven by Creditor will be taken to be an amount of $500 000. This amount comprises the proportion of the debt that is expressed to be forgiven ($480 000) and the proportion of the debt extinguished by the consideration ($20 000).