Issue
Where a 'commercial debt' is forgiven and the debtor has to apply a residual forgiven amount in reduction of net capital losses under Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936), does this reduction requirement include net capital losses that the debtor could not apply in working out if there was a net capital gain for the forgiveness year of income?
Decision
No. Section 245-130 of Schedule 2C to the ITAA 1936 only applies a residual forgiven amount in reduction of deductible net capital losses.
Facts
Debtor is a company.
Debtor has a residual forgiven amount to be applied under section 245-130 of Schedule 2C to the ITAA 1936 in reduction of deductible net capital losses.
Debtor made no capital gains or losses in the forgiveness year of income.
Due to a change in ownership and business Debtor has a net capital loss in respect of a year of income prior to the forgiveness year of income that Debtor is precluded by Subdivision 165-CA of the Income Tax Assessment Act 1997 (ITAA 1997) from applying in calculating whether there is a net capital gain in respect of the forgiveness year of income.
Reasons for Decision
Where commercial debts are forgiven after 27 June 1996, the total net forgiven amount in the forgiveness year of income must be applied, in accordance with the provisions of Schedule 2C to the ITAA 1936, to successively reduce the debtor's deductible revenue losses, deductible net capital losses, deductible expenditures and the relevant cost base of certain CGT assets.
Subsection 245-105(6) of Schedule 2C to the ITAA 1936 provides that, to the extent to which the total net forgiven amount cannot be applied to reduce deductible revenue losses, the remaining unapplied amount, referred to as the 'residual forgiven amount', must be applied to the maximum extent possible, to reduce deductible net capital losses incurred by the debtor in years of income before the forgiveness year of income.
Pursuant to section 245-125 of Schedule 2C to the ITAA 1936: 'deductible net capital loss means a net capital loss that: (a) the debtor has for an income year prior to the forgiveness year of income; and (b) apart from this Subdivision, could be applied in working out the debtor's net capital gain for the forgiveness year of income (assuming the debtor had enough net capital gains).'
Therefore the non-deductible net capital loss is not reduced under Schedule 2C to the ITAA 1936.