Issue
In calculating the first applicable amount under subsection 245-55(2) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) in circumstances where debtor solvency is to be assumed, is the 'value of the debt' to be determined with regard to the amount paid for the debt by the new creditor, where the rights to the debt were transferred to a new creditor?
Decision
No. The value of the debt is to be determined without regard to the amount actually paid by the new creditor in respect of the debt.
Facts
Debtor incurred a commercial debt as defined in section 245-25 of Schedule 2C to the ITAA 1936 with Creditor.
The face value and market value of the debt at that time were each $1,000.
After 27 June 1996, Creditor sold the debt such that the rights were transferred to New Creditor for its then market value of $800 as Debtor was undergoing financial difficulties.
New Creditor subsequently forgave Debtor the debt under section 245-35 of Schedule 2C to the ITAA 1936 as Debtor was unable to repay any of the $1,000.
The notional value of the debt will be calculated under section 245-55 of Schedule 2C to the ITAA 1936 as sections 245-60 and 245-61 of Schedule 2C to the ITAA 1936 do not apply.
Debtor, Creditor and New Creditor are all unrelated parties and dealt at arm's length in relation to the debt.
There were no changes in any market variables for the purposes of subsection 245-55(2) of Schedule 2C to the ITAA 1936.
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 notional value of a debt is calculated under section 245-55 of Schedule 2C to the ITAA 1936 where sections 245-60 and 245-61 of Schedule 2C do not apply.
As Debtor, Creditor and New Creditor all dealt at arm's length, subsection 245-55(4) of Schedule 2C to the ITAA 1936 has no application.
Therefore the first applicable amount under subsection 245-55(2) of Schedule 2C to the ITAA 1936 is to be calculated as if Debtor was able to repay the debt when it was incurred and when it was forgiven.
The reference to 'incurred' in subsection 245-55(2) of Schedule 2C to the ITAA 1936 refers to the time when Debtor incurred its debt with Creditor as the transfer of Creditor's rights in respect of the debt to New Creditor did not extinguish that debt or result in Debtor incurring a new debt with New Creditor.
As New Creditor has assumed the rights of a creditor in relation to the debt, the reference to 'creditor' in subsection 245-55(2) of Schedule 2C to the ITAA 1936 is referring to New Creditor in these particular circumstances.