Commercial debt forgiveness: trade debt forgiven

Where a taxpayer has a trade debt forgiven, is this a 'debt' for the purposes of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The definition of 'debt' in subsection 245-15(1) of Schedule 2C to the ITAA 1936 includes a trade debt.

A debtor incurred a trade debt in September 2001 by way of a properly executed written contract.

Interest became payable in respect of the debt when it was not fully paid within 30 days. The interest expense was an allowable deduction.

In April 2002, the trade creditor, having regard to the debtor's financial problems, entered into a formal deed of release of the amount of outstanding debt as at that date.

Subsection 245-15(1) of Schedule 2C to the ITAA 1936 defines debt as 'an enforceable obligation imposed by law on a person to pay an amount to another person'.

The term 'enforceable obligation' encompasses debts owing to a trade creditor.

Section 245-25 of Schedule 2C to the ITAA 1936 provides that a 'commercial debt' includes a debt on which interest paid is an allowable deduction.