Simply put, the commercial debt forgiveness (CDF) rules are important when someone who is owed money forgives the debt. If the debt was part of the lender's business income, they might get a tax benefit when they forgive it. However, without these rules, there would be no tax impact for the borrower when the debt is forgiven.
These rules are made to prevent people from using debt forgiveness to manipulate the tax system, especially if the lender and borrower are related. They ensure that the borrower doesn't get away without any tax consequences when their debt is forgiven.
Here's how the rules work:
- The forgiven amount is used to reduce certain losses or expenses that the borrower could have used to lower their taxes.
- If there's any forgiven amount left after that, it's not counted as income for the borrower or carried forward to future years.
- If the borrower is part of a partnership, any leftover forgiven amount is divided among the partners.
A debt is considered a commercial debt if the interest on it is or could be tax-deductible for the borrower. Even if no interest is charged, the debt still falls under these rules if it would have been tax-deductible.
Got questions? Reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment on our live calendar.
