Issue
Where a debtor, during the forgiveness year of income, provides a creditor with a CGT asset as part consideration for the forgiveness of a commercial debt, can Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) operate to reduce the cost bases of the CGT asset?
Decision
Yes. Pursuant to subsection 245-165(1) of Schedule 2C to the ITAA 1936 the reducible assets of a debtor are the debtor's CGT assets (other than excluded assets) as at the beginning of the forgiveness year of income.
Facts
A commercial debt of Debtor was forgiven after 27 June 1996.
During the forgiveness year of income Debtor transferred the ownership of a CGT asset to Creditor as part consideration for the forgiveness of the debt.
The CGT asset was not an 'excluded asset' as defined in section 245-170 of Schedule 2C to the ITAA 1936.
During the forgiveness year of income, Debtor owned no other CGT assets.
As a result of the forgiveness of the debt, Debtor had a residual forgiven amount, as defined in subsection 245-165(1) of Schedule 2C to the ITAA 1936.
Reasons for Decision
Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C to the ITAA 1936 applies where a forgiveness of a commercial debt occurred after 27 June 1996.
Section 245-175 of Schedule 2C to the ITAA 1936 requires that the Debtor's residual forgiven amount is to be applied to the maximum extent possible, in reduction of the relevant cost bases of the Debtor's reducible assets.
Subsection 245-165(1) of Schedule 2C to the ITAA 1936 states that a reducible asset means a CGT asset (other than an excluded asset) of the debtor at the beginning of the forgiveness year of income.
Accordingly, the fact that Debtor transferred ownership of the CGT asset to Creditor during the forgiveness year of income, does not preclude the CGT asset from being a reducible asset of Debtor's.