Commercial debt forgiveness - whether accrued interest on a loan is a separate debt

Does accrued interest on a loan constitute a separate debt from the loan for the purposes of the commercial debt forgiveness provisions in Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

No. Accrued interest is not a separate debt. Refer to section 245-20 of Schedule 2C to the ITAA 1936.

An individual borrowed funds from an unrelated lender on 1 January 2000.

Interest payable by the individual in respect of the loan was deductible as the loan was used in purchasing a rental property that derived assessable income for the individual.

In March 2002 the individual had not repaid a substantial portion of the original loan and an additional amount of accrued interest in respect of the loan.

Having regard to financial difficulties that the individual was suffering, the lender released the individual from having to pay the accrued interest and part of the outstanding principal.

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.

The term 'debt' is defined in subsection 245-15(1) of Schedule 2C to the ITAA 1936 as '...an enforceable obligation imposed by law on a person to pay an amount to another person'.

Section 245-20 of Schedule 2C to the ITAA 1936 provides that: If there is, in respect of a debt, any interest or amount in the nature of interest that has accrued but has not been paid, the obligation to pay that interest or amount is not a separate debt but the first-mentioned debt includes the obligation to pay the interest or amount.

Therefore the 'debt' owing by the individual for the purposes of Schedule 2C to the ITAA 1936 immediately prior to the lender's release was the combined outstanding principal and the accrued interest .

Pursuant to subsection 245-245(1) of Schedule 2C to the ITAA 1936, the term 'debt' includes a part of a debt. Thus, the commercial debt that was forgiven for the purposes of applying Schedule 2C to the ITAA 1936 was the total amount forgiven by the lender.