Issue
Is it a condition of applying the special rule in section 245-60 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) for working out the notional value of a non-recourse debt that there must be contractual or other legal limitations upon a Creditor's rights of recourse against a Debtor?
Decision
Yes. To be a non-recourse debt as defined in subsection 245-60(1) of Schedule 2C to the ITAA 1936, the rights of the creditor as against the debtor in the event of default in the payment of the debt must be subject to contractual or other legal limitations.
Facts
Debtor entered into a loan agreement with Creditor to finance the acquisition of its sole business asset.
The debt incurred by Debtor constituted a commercial debt within section 245-25 of Schedule 2C to the ITAA 1936.
The loan agreement between Debtor and Creditor did not contain any terms limiting Creditor's rights of recourse against Debtor in the event of default by Debtor.
When Debtor defaulted under the loan agreement, Creditor forgave the debt owing by Debtor for commercial reasons.
The debt forgiveness occurred after 27 June 1996.
Reasons for Decision
Subsection 245-60(1) of Schedule 2C to the ITAA 1936 provides: 'This section applies to a debt (the non-recourse debt ) if the debt was incurred directly in respect of the financing of the cost of the acquisition, construction or development of property (but not including the manufacture of goods) by the debtor and the rights of the creditor as against the debtor in the event of default in the payment of the debt or the payment of interest are limited to all or any of the following: (a) rights (including the right to moneys payable) in relation to all or any of the following: (i) the property or the use of the property; (ii) goods produced, supplied, carried, transmitted or delivered, or services provided, by means of the property; (iii) the loss or disposal of the whole or a part of the property or of the debtor's interest in the property; (b) rights in respect of a mortgage or other security over the property; (c) rights arising out of any arrangement relating to the financial obligations, in relation to the property, of the end-user of the property towards the debtor.'
As the loan agreement between Debtor and Creditor imposed no such limitations upon Creditor's rights of recourse against Debtor, the special rule in section 245-60 of Schedule 2C to the ITAA 1936 does not apply to determine the notional value of the commercial debt incurred by Debtor. Instead the notional value of the debt is determined under section 245-55 of Schedule 2C to the ITAA 1936.