Commercial Debt Forgiveness - subscription for shares in a company to enable debt to be paid

Is a commercial debt forgiven under Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) where a creditor subscribes for shares in the debtor and the debtor applies part of the subscription money to make a payment towards discharge of the debt?

Yes. Subsection 245-35(5) of Schedule 2C to the ITAA 1936 provides that so much of the debt that is paid out of the subscription money is forgiven when the money is so applied.

After 27 June 1996 a creditor agreed to subscribe for shares in a debtor company in part to enable the debtor to discharge a commercial debt owed to the creditor.

Subsequently the debtor used part of the money subscribed by the creditor towards discharge of the commercial debt.

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(5) of Schedule 2C to the ITAA 1936 provides in respect of a commercial debt that where '(a) a person subscribes for shares in a company to enable the company to make a payment in or towards discharge of a debt owed by it to the person; an (b) the company applies all or any of the money subscribed in or towards payment of the debt; then: (c) so much of the debt as is paid out of the money so applied is taken to be forgiven; an (d) the time of the forgiveness is taken to be the time when the money is so applied.'

Accordingly, so much of the commercial debt that was discharged with money subscribed by the creditor for the debtor's shares, is taken to be forgiven for the purposes of Schedule 2C to the ITAA 1936 on the date when the money was so applied