Issue
Where a private company forgives a debt owed to it by a shareholder and the amount forgiven was included in the assessable income of the shareholder under section 109F of the Income Tax Assessment Act 1936 (ITAA 1936), do the commercial debt forgiveness provisions contained in Schedule 2C to the ITAA 1936 apply?
Decision
No. The provisions of Schedule 2C to the ITAA 1936 do not apply where the forgiven amount is included in the assessable income of the debtor. The relevant forgiven amount is not a debt for the purposes of section 245-15 of Schedule 2C to the ITAA 1936.
Facts
An individual shareholder was loaned an amount by a private company on 1 December 1998.
The loan was made to the individual in their capacity as a shareholder of the company.
In March 2000 the company formally forgave the shareholder's debt of the amount.
Pursuant to section 109F of the ITAA 1936 the forgiven debt constitutes an assessable dividend paid to the shareholder.
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'.
That definition 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.
Therefore Schedule 2C to the ITAA 1936 has no application to the forgiveness by the company of the amount loaned to the shareholder as the relevant amount constitutes assessable income to the shareholder.