Issue
Where pursuant to an agreement a debtor is released from an obligation to pay a debt with effect from a future time in return for the debtor making future payments that are not nominal or insignificant, is the debt taken to be forgiven at the time of entering into the agreement for the purposes of subsection 245-35(1) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. As the debt has not been released, waived or otherwise extinguished at the time of the relevant agreement it is not taken for the purposes of applying Schedule 2C to the ITAA 1936 to be forgiven at that time.
Facts
After 27 June 1996 Creditor agreed to release Debtor from its obligations to pay the relevant debt in consideration of future payments that were not nominal or insignificant.
The debt was a commercial debt for the purposes of section 245-25 of Schedule 2C to the ITAA 1936.
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.
Whilst the debt maybe forgiven upon Debtor making the agreed payments, the entering into of the relevant agreement itself does not result in the debt being immediately forgiven for the purposes of subsection 245-35(1) of Schedule 2C to the ITAA 1936 as the agreed forgiveness is subject to conditions precedent being the making of the agreed payments.
Subsection 245-35(3) of Schedule 2C to the ITAA 1936 does not apply because the debtor's obligations under the agreement are neither nominal nor insignificant.