Issue
Is a Pay As You Go (PAYG) withholding taxation debt forgiven by the Commonwealth, a commercial debt for the purposes of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) if interest paid or payable in respect of the debt is an allowable deduction?
Decision
No. Subsection 245-25(4A) of Schedule 2C to the ITAA 1936 specifically excludes it from being a commercial debt.
Facts
Debtor, a company, withheld tax from its employees wages pursuant to section 12-35 of the Taxation Administration Act 1953 (TAA 1953) for an income year which ended after 27 June 1996.
Debtor reported, but failed to remit this amount to the Australian Taxation Office and consequently it accumulated a PAYG withholding taxation debt (the debt).
This debt accrued General Interest Charge (GIC) which is deductible under paragraph 25-5(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997).
Debtor was subsequently released from paying the debt.
Reasons for Decision
Section 245-10 of Schedule 2C to the ITAA 1936 provides that Division 245 of the ITAA 1936 applies to the forgiveness of a commercial debt after 27 June 1996.
Subsection 245-25(2) of Schedule 2C to the ITAA 1936 provides that a debt is a commercial debt if the whole or any part of the interest paid or payable in respect of the debt is or would be allowable as a deduction to the debtor. That condition is satisfied here as the accrued GIC in relation to the debt is deductible to the debtor under paragraph 25-5(1)(c) of the ITAA 1997.
However, subsection 245-25(2) of the ITAA 1936 is subject to subsection 245-25(4A) of Schedule 2C to the ITAA 1936 which provides that a debt owed to the Commonwealth that arose under a law relating to taxation is not a commercial debt.
As PAYG withholding tax is imposed by the TAA 1953, a Commonwealth Taxation Act, the amount of PAYG withholding tax owing to the Australian Taxation Office is a debt owed to the Commonwealth relating to taxation.
Accordingly the PAYG withholding taxation debt is not a commercial debt so Schedule 2C to the ITAA 1936 has no application in the present circumstances.