Three half years after first flagging the changes, the ATO has confirmed new rules regarding a company’s emotional abilities to forgive debt. This will have implications, particularly for family law and business breakdowns.
Background to changes
The commercial debt forgiveness rules were introduced in 1996 to resolve a perceived ‘gain’ that a person makes when a commercial debt that they owe is forgiven. The rules cancel out this gain by reducing tax losses, net capital losses, certain other deductions and the cost bases of CGT assets up to the ‘net forgiven amount’. There were exceptions to the commercial debt forgiveness rules, including where the forgiveness of the debt is for reasons of ‘natural love and affection’, i.e., a gift.
In mid-2003, the ATO published their non-binding comments, noting they believed that a debt from a company could be forgiven for reasons of natural love and affection, and this exemption could therefore apply. This interpretation was widely used in family breakdowns, in mitigating the tax implications of separation. Then on 6 February 2019, the ATO withdrew these non-binding comments.
On 2 October 2019, the ATO set out a question as to whether the exclusion for debts forgiven for reasons of natural love and affection require that the creditor be a natural person. What followed was a two and a half year wait for confirmation to this question.
Implication of changes
On 9 February 2022, it was confirmed by the ATO that the exclusion for debts forgiven for reasons of natural love and affection requires that the creditor is a natural person. This means advisors need to be cautious about relying on this particular exemption.
However, the ATO did clarify that the debtor need not be a natural person, meaning there could be situations where an individual forgives debt to a company or trust. However, more care will be need to be taken when advising on forgiveness of debt and the tax implications.
