Issue
Where two or more persons, who are not partners, are liable to pay a commercial debt which is then forgiven, will the gross forgiven amount of the debt be apportioned amongst each of the persons liable?
Decision
Yes. The gross forgiven amount of the debt will be apportioned amongst each of the persons liable to pay the commercial debt in accordance with subsection 245-75(3) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
Company A, Company B, and Company C were participants in a mining joint venture (collectively 'the joint venture').
The special rules in Subdivision 245-F of Schedule 2C to the ITAA 1936 do not apply to the joint venture as it does not constitute a partnership.
The joint venture incurred a debt to Creditor which Company A, Company B, and Company C were all severally liable to pay.
The debt constituted a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936 in respect of all three participants in the joint venture.
After 27 June 1996 Creditor forgave the debt owing by the joint venture for commercial reasons.
Had the debt forgiven by Creditor been incurred by one person only, the gross forgiven amount of the debt calculated in accordance with section 245-75 of Schedule 2C to the ITAA 1936 would have been $30 million.
Reasons for Decision
Subsection 245-75(3) of Schedule 2C to the ITAA 1936 provides as follows: 'If 2 or more persons were liable (otherwise than as partners in a partnership) to pay a debt, whether their liability was joint or several, or joint and several, the gross forgiven amount of the debt in relation to the person, or each of the persons, in respect of whom the debt was a commercial debt, is the amount worked out using the formula: Overall gross forgiven amount / Number of commercial debtors where: overall gross forgiven amount means the amount that would be the gross forgiven amount of the debt if all the persons liable to pay the debt were treated as a single person and the debt was a commercial debt in respect of that person. number of commercial debtors means the number of persons liable to pay the debt in respect of whom the debt was a commercial debt.'
The overall gross forgiven amount of the debt within subsection 245-75(3) of Schedule 2C to the ITAA 1936 is $30 million.
Therefore the gross forgiven amount of the debt in relation to each of Company A, Company B, and Company C is calculated as follows: $30 million / 3 =$10 million.