Issue
Does a debt constitute a commercial debt pursuant to section 245-25 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) where interest paid in respect of the debt would be allowable as a deduction apart from the operation of section 82SA of the ITAA 1936?
Decision
Yes. The debt is a commercial debt because section 82SA of the ITAA 1936 is an exception provision for the purposes of subsection 245-25(2) of Schedule 2C to the ITAA 1936.
Facts
Debtor incurred a debt in the form of a convertible note loan from 'Lender' on 1 February 1998.
Interest in respect of the loan is not deductible to Debtor because of the operation of section 82SA of the ITAA 1936.
Subsequently Lender formally released Debtor from repaying the debt.
Reasons for Decision
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.
The term 'commercial debt' is defined in section 245-25 of Schedule 2C to the ITAA 1936.
Paragraph 245-25(2)(b) of Schedule 2C to the ITAA 1936 provides that a debt is a 'commercial debt' if the whole or any part of the interest paid or payable in respect of the debt would be allowable apart from the operation of an 'exception provision'.
The term 'exception provision' is defined in subsection 245-25(5) of Schedule 2C to the ITAA 1936 as follows: 'exception provision means a provision of this Act that has the effect of preventing a deduction that would otherwise be allowable, but does not include paragraphs 8-1(2)(a), (b) and (c) of the Income Tax Assessment Act 1997 (which prevent deductions for capital, private or domestic outgoings and for outgoings relating to exempt income).'
Section 82SA of the ITAA 1936 is therefore an exception provision for the purposes of paragraph 245-25(2)(b) of Schedule 2C to the ITAA 1936
Accordingly Schedule 2C to the ITAA 1936 applies to the forgiveness of the commercial debt owed by Debtor to Lender.