Issue
Where a debt is taken to be forgiven under subsection 245-35(5) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) due to a creditor subscribing for shares in the debtor is the debtor deemed to have paid market value consideration in respect of the forgiveness?
Decision
Yes. Where a forgiveness is taken to have occurred under subsection 245-35(5) of Schedule 2C to the ITAA 1936, the consideration in respect of a forgiveness is calculated under subsection 245-65(4) of Schedule 2C by reference to the market value of the shares subscribed for, as at immediately after their issue.
Facts
Due to Creditor subscribing for shares in Debtor after 27 June 1996, a commercial debt owed by Debtor to Creditor was taken to be forgiven under subsection 245-35(5) of Schedule 2C to the ITAA 1936.
The Creditor paid $9 000 for the subscribed shares, which had a market value of $10 000 as at the time the subscription moneys were paid.
Immediately after the issue of the shares their market value totalled $11 000.
Half the $9 000 paid by the Creditor for the subscription of shares was applied towards discharge of the debt owed by Debtor to Creditor.
Reasons for Decision
Where a commercial debt is taken to be forgiven under subsection 245-35(5) of Schedule 2C to the ITAA 1936 the consideration in respect of the forgiveness is calculated under subsection 245-65(4) of Schedule 2C to the ITAA 1936. Subsection 245-65(4) provides: 'If a debt is forgiven by subscribing for shares in a company as mentioned in subsection 245-35(5), the consideration in respect of the forgiveness of the debt is the amount worked out using the formula: (Amount applied x Market value of shares subscribed for) / Amount subscribed where: amount applied means the amount applied by the company as mentioned in paragraph 245-35(5)(b). amount subscribed means the amount subscribed as mentioned in paragraph 245-35(5)(a). market value of shares subscribed for means the market value, of all the shares in the company that were subscribed for as mentioned in paragraph 245-35(5)(a), immediately after those shares were issued.'
Accordingly the consideration in respect of the forgiveness is $5 500 as the relevant market value of shares for the purposes of subsection 245-65(4) of the ITAA 1936 is referable to the time immediately after the issue of the relevant shares. That is: (1/2 x $9 000 x $11 000) / $9 000