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No Love for Companies: Forgiving a Debt: New ATO Taxation Determination TD 2022/1

By Alicia Hill, Principal and Robert Kukuruzovic, Law Clerk

Under Division 245 of the Income Tax Assessment Act 1997 (Cth), debts that a creditor forgives are offset against amounts that could otherwise reduce taxable income.

Paragraph 245-40(e) excludes a debt that is forgiven for reasons of natural love and affection from those offset provisions.

The Commissioner of Taxation has now ruled that for the purposes of paragraph 225-40(e), the creditor forgiving the debt must be a natural person.

In making this ruling, the Commissioner holds that an entity that is not a natural person, e.g. a company, cannot feel natural love and affection. Consequently, that entity is not able to forgive a debt for that reason.

This ruling takes effect from 9 February 2022 and applies to years of income both before and after this date. However, it will not apply to where it conflicts with settlement terms of a dispute agreed to before this date.

The Commissioner also notes that this ruling takes a different view to the previous ATO Decision 2003/509,[1] but that resources will not be devoted to chasing debts forgiven under that ruling prior to 6 February 2019, when it was withdrawn, unless it is asked or required to do so.

The Commissioner rejects the argument that the rule only specifies that the debt is forgiven for reasons of natural love and affection, not that the creditor forgiving the debt must feel the requisite love and affection.

In rejecting this argument, the Commissioner states that when read in full and in context, the love and affection must indeed be felt by the Creditor.

In the explanation for the ruling, there are some other interesting factors to note:

  1. The debtor whose debt is being forgiven does not need to be a natural person. Only the object of the creditor’s natural love and affection that is the reason for the debt forgiveness needs to be a natural person.
  2. A natural person may forgive a debt in their capacity as a trustee of a trust or as a partner in a partnership under this provision. This would of course be limited by the scope of the individual trust or partnership relationship.

This ruling limits the options of those seeking to forgive debts, who may now need to find alternative provisions to rely on.

If you have any queries about any of the matters raised by this ruling, then please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au

[1] ATO Interpretative Decision ATO ID 2003/589 Commercial debt forgiveness – can a company forgive a debt for reasons of natural love and affection?