Issue
Where a debtor purchases an item of plant, is the amount owing to the creditor a 'debt' for the purposes of Schedule 2C to the Income Tax Assessment Act 1936 ('ITAA 1936')?
Decision
Yes. An amount owing in respect of the purchase of an item of plant is a 'debt' for the purposes of section 245-15 of Schedule 2C to the ITAA 1936.
Facts
A customer purchased an item of plant from a creditor on 29 July 1996 under a legally enforceable agreement. The creditor agreed to accept payment by way of 4 equal annual instalments..
Title in the plant passed to the customer upon entering into the agreement with the creditor. The customer depreciated the plant at a rate of 10 per cent per annum on a prime cost basis.
The creditor did not charge the customer any interest in relation to the purchase of the plant. However, if interest had been charged in relation to the agreement to purchase the plant, then that interest would have been an allowable deduction to the customer under subsection 51(1) of the ITAA 1936 or section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
The customer was unable to pay the final instalment. For commercial reasons the creditor did not institute any legal proceedings and decided to forgive the debt outstanding on 28 June 2002.
Reasons for Decision
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 obligation on the customer to repay the creditor was a legally enforceable one.
Subsection 245-25(3) of Schedule 2C to the ITAA 1936 stipulates that a debt will be a 'commercial debt' if: ...interest, or an amount in the nature of interest, is not payable in respect of the debt but, had interest or such an amount been payable, the whole or any part of the interest or amount: (a) would have been allowable as a deduction to the debtor; or...
Therefore, the relevant debt owed by the customer to the creditor is properly characterised as a commercial one.
Accordingly, Division 245 of Schedule 2C to the ITAA 1936 does apply to the forgiveness of the relevant debt.