Commercial Debt Forgiveness - deemed consideration for a non-moneylending debt where debtor and creditor not dealing at arm's length

Where a debtor provides consideration in respect of the forgiveness of a non-moneylending debt that is less than the market value of the debt as at the time of the forgiveness, and the debtor and creditor were not dealing with each other at arm's length in connection with the forgiveness, will the debtor be taken to have paid consideration equal to the market value of the debt for the purposes of subsection 245-65(2) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. Paragraph 245-65(2)(c) of Schedule 2C to the ITAA 1936 provides that where a debtor pays consideration in respect of the forgiveness of a non-moneylending debt that is greater or less than the market value of the debt as at the time of the forgiveness, and the debtor and creditor were not dealing with each other at arm's length in connection with the forgiveness, the debtor will be taken to have paid consideration equal to the market value of the debt as at the time of the forgiveness.

After 27 June 1996 Creditor forgave a debt owed by Debtor.

The consideration provided by Debtor in respect of the forgiveness of the debt was less than the market value of the debt as at the time of the forgiveness and Debtor and Creditor did not deal with each other at arm's length in connection with the forgiveness.

The debt was a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936.

The debt was not a moneylending debt as defined in subsection 245-245(1) 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.

Paragraph 245-65(2)(c) of Schedule 2C to the ITAA 1936 deems Debtor to have paid consideration equal to the market value of the debt as the consideration provided in respect of the debt forgiveness was less than the market value of the debt as at the time of forgiveness, and Debtor and Creditor were not dealing with each other at arm's length in connection with the forgiveness.