Issue
Can a creditor that is an exempt entity, as defined by subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), agree to forgo under section 245-90 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936), a capital loss as the result of the forgiveness of a commercial debt?
Decision
No. Any capital loss that the creditor otherwise would have made in respect of the forgiveness is disregarded under section 118-70 of the ITAA 1997 such that the creditor has no entitlement to a capital loss that it can forgo.
Facts
A commercial debt owed by a debtor company was forgiven on 22 March 2004.
The forgiveness meant that the debtor had a net forgiven amount for the purposes of Schedule 2C to the ITAA 1936.
The relevant creditor company was an exempt entity as defined in subsection 995-1(1) of the ITAA 1997.
The creditor and debtor were under common ownership at all relevant times.
The creditor would have made a capital loss in respect of the forgiveness that was disregarded by section 118-70 of the ITAA 1997.
The creditor and debtor want to make an agreement under subsection 245-90(2) of Schedule 2C to the ITAA 1936 in respect of the relevant forgiveness.
Reasons for Decision
The creditor and debtor satisfy the conditions in subsection 245-90(1) of Schedule 2C to the ITAA 1936.
However, in order to make an agreement to forgo all or part of a capital loss it is necessary that the creditor be otherwise entitled to that loss.
Whilst the creditor did incur a capital loss in respect of the forgiveness that capital loss is disregarded by section 118-70 of the ITAA 1997 such that the creditor has no entitlement to a capital loss that it can forgo.
The disregarding of a capital loss under section 118-70 of the ITAA 1997 is compulsory and not dependent on any choice being made by the creditor.