Commercial debt forgiveness - release of debt by debt/equity swap

Where a commercial debt is released by a creditor in return for the issue of shares in a debtor (a debt/equity swap) is the debt forgiven under Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The debt that is released by a creditor in return for the issue of shares in a debtor is forgiven under subsection 245-35(1) of Schedule 2C to the ITAA 1936.

After 27 June 1996 a debtor company is released from a debt in return for issuing shares to a creditor.

The debt is 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(1) of Schedule 2C to the ITAA 1936 provides that a debt is forgiven if the debtor's obligation to pay the debt is released or waived, or is otherwise extinguished. Accordingly, the release of the debt by the creditor pursuant to a debt/equity swap constitutes a forgiveness of the debt.

Note: Subsection 245-35(5) of Schedule 2C of the ITAA 1936 provides that a forgiveness of a debt also occurs where a debtor and creditor undertake a form of debt for equity swap with money subscribed by the creditor to acquire shares in the debtor. All or part of the money subscribed is applied by the debtor to discharge the debt, or part of it.