Issue
Is a loan owed to the trustee of a trust estate a 'debt' for the purposes of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The loan constitutes such a 'debt' pursuant to section 245-15 of Schedule 2C to the ITAA 1936 as it is an enforceable obligation imposed by law to pay an amount to another person.
Facts
Prior to 27 June 1996 an individual 'T' as trustee loaned trust funds to a business (company).
After 27 June 1996 that debt was forgiven because of the company's inability to repay the debt.
Interest paid in respect of debt constituted an allowable deduction to the company.
Reasons for Decision
Subsection 245-15(1) of Schedule 2C to the ITAA 1936 defines a 'debt' as an enforceable obligation imposed by law on a 'person' to pay an amount to another person.
Per subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) the definition of 'person' encompasses a company
The loan owed by the company constitutes a legally enforceable obligation to pay an amount to a person, T, in whom the property of the trust was vested.
As interest paid in respect of the debt was an allowable deduction the debt is therefore a commercial debt, as defined in section 245-25 of Schedule 2C to the ITAA 1936.
Accordingly, section 245-10 of Schedule 2C to the ITAA 1936 provides that the Schedule applies in these circumstances, as there has been the forgiveness of a commercial debt after 27 June 1996. Tax Assessment Act 1997
subsection 995-1(1)