Commercial debt forgiveness - debt used for private purposes at time of forgiveness

Is a debt a 'commercial debt' for the purposes of section 245-25 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) where the debt is being used for private purposes at the time of forgiveness but prior to forgiveness an amount of interest paid was an allowable deduction to the debtor?

Yes. Subsection 245-25(2) of Schedule 2C to the ITAA 1936 does not specify that interest must be deductible at all times whilst a debt is in existence.

Debtor acquired a property exclusively for use as a rental property, with the purchase being partially financed by a loan from Creditor.

Whilst the property was being used as a rental property interest paid in respect of the loan was an allowable deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsequently Debtor commenced to use the property exclusively as a residential home. Accordingly, interest payable by Debtor from that date was not deductible.

After 27 June 1996 Creditor forgave the amount of debt then outstanding.

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 245-25(2) of Schedule 2C to the ITAA 1936 provides that: 'Subject to subsection (4A), a debt is a commercial debt if the whole or any part of interest, or of an amount in the nature of interest, paid or payable in respect of the debt: (a) is or would be allowable as a deduction to the debtor; or (b) would be so allowable apart from the operation of an exception provision.'

Subsection 245-25(2) of Schedule 2C to the ITAA 1936 does not specify that interest must be deductible at all times whilst a debt is in existence. The debt is therefore a commercial debt even though it was being used for private purposes at the time of forgiveness.