Issue
Do the Commercial Debt Forgiveness provisions in Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) apply to the forgiveness of an interest free loan made by a beneficiary of a non-fixed trust to the trust?
Decision
No. The loan does not constitute a commercial debt as defined in section 245-25 of Schedule 2C to the ITAA 1936 as interest payable in respect of the loan would not be deductible to the debtor under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
Creditor loaned funds on an 'interest free' basis to an associated entity, that is, Debtor.
Creditor is a beneficiary of Debtor, which is a non-fixed trust.
The loan by Creditor constituted a debt within the meaning of section 245-15 of Schedule 2C to the ITAA 1936.
At no stage over the term of the loan was interest payable by Debtor in respect of the loan.
Had interest been payable by Debtor it would not have been allowable as a deduction.
The Creditor formally forgave Debtor the amount of debt then outstanding.
Reasons for Decision
Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C applies where the forgiveness of a commercial debt occurs after 27 June 1996.
Pursuant to subsection 245-25(1) of Schedule 2C to the ITAA 1936 a debt is a commercial debt if subsections (2), (3) or (4) provide that the debt is a commercial debt.
As no interest was ever payable in respect of the debt subsection 245-25(2) of the ITAA 1936 is not enlivened. Furthermore, subsection 245-25(4) of the ITAA 1936 is not relevant.
Subsection 245-25(3) of the ITAA 1936 provides: 'A debt is a commercial debt if interest, or an amount in the nature of interest, is not payable in respect of the debt but, had interest or such an amount been payable, the whole or any part of the interest or amount: (a) would have been allowable as a deduction to the debtor; or (b) would have been so allowable apart from the operation of an exception provision.'
As Debtor would not have been entitled to a deduction for any interest expense under section 8-1 of the ITAA 1997 (if charged), subsection 245-25(3) of the ITAA 1936 does not deem the forgiven debt to be a commercial debt.