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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 has over 15 years' experience advising South Australian businesses. Her legal practice is focused on taxation and commercial law. Julie acts for clients in business restructures, acquisitions, disposals and mergers specialising in SME tax and commercial issues. She has significant expertise in business succession planning and intergenerational transfers, particularly for high net worth individuals. Julie has practised in both accountancy and law and also facilitates on the Law Society of South Australia's GDLP program and tutors in Equity at the University of Adelaide. - Current at 30 August 2017
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