Issue
Is a debt incurred in respect of the purchase of trading stock excluded from the definition of 'debt' because of the assessable income exception in subsection 245-15(3) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. It is the debt incurred in acquiring the trading stock and not the proceeds of sale of the trading stock that must be included in the assessable income of the debtor for the exception in subsection 245-15(3) of Schedule 2C of the ITAA 1936 to apply.
Facts
A trading business acquired trading stock from an unrelated supplier (the supplier) in February 1998.
The trading stock was sold by that business in March 1998.
The business defaulted on payment for the trading stock.
The supplier subsequently made a commercial decision to forgive the debt of the business on 30 June 2000.
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.
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'.
The purchase of the trading stock by the business created an enforceable obligation to pay the supplier.
The definition of the term 'debt' is subject to modification by subsection 245-15(3) of Schedule 2C to the ITAA 1936 , which specifies that: An amount that, apart from this subsection, would be an enforceable obligation referred to in subsection (1) is not to be regarded as a debt if the amount has been, or will be, included in the assessable income of any year of income of the person on whom the obligation is imposed.
The 'amount' referred to in subsection 245-15(3) is the amount owed by the debtor that constitutes an enforceable obligation for the purposes of subsection 245-15(1) of the ITAA 1936.
Whilst the business returned an amount as assessable income in respect of the sale of the trading stock it acquired, that assessable income is not relevant for the purposes of considering subsection 245-15(3) of Schedule 2C to the ITAA 1936 as it is the debt itself that must constitute assessable income in order for that subsection to apply.