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Debt forgiveness – Is it really that scary?


In the SME environment, a business is often conducted via one or more separate legal entities, all of which are controlled by the same person or group of people. Frequently, the adviser considering the tax aspects of the forgiveness of a debt must consider the effect of forgiveness on both debtor and creditor. The creditor may want to write the debt off and claim a deduction or capital loss. The debtor may wish to avoid gaining assessable income. Usually, debt forgiveness will not constitute ordinary income and the commercial debt forgiveness provisions in Div 245 of the Income Tax Assessment Act 1997 may apply.

The operational provisions of the Division describe how to quantify the relevant forgiven amounts and the application of those amounts to reduce a company’s or related company’s tax attributes. This article focuses initially on the position of the debtor but goes on to consider some of the issues the creditor may face.

Author profile

Julie Van der Velde CTA
Julie Van der Velde, CTA, is the principal of a specialised commercial law firm, VdV Legal, and has degrees in Business and Law and a Masters of Taxation Law. With over 20 years experience advising South Australian businesses, her practice focuses on taxation and trust law with an emphasis on estate planning, tax planning, business structuring, business succession and intergenerational transfers. Julie is The Tax Institute’s SME Chartered Tax Adviser for 2017 and is listed as a recommended Wills, Estates and Succession Planning lawyer in Doyle's Guide 2017. - Current at 22 January 2018
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