Understanding Exceptions to the Commercial Debt Forgiveness (CDF) Rules
Commercial debt forgiveness can have significant tax implications, but there are key exceptions where the CDF rules do not apply. According to Section 245-40, there are six scenarios where debt forgiveness escapes these rules:
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Fringe Benefits: If the forgiveness of the debt qualifies as a fringe benefit under the Fringe Benefits Tax (FBT) Act, such as a debt waiver, it is not covered by the CDF rules.
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Inclusion in Assessable Income: If the debt has been or will be included in the debtor's taxable income (for example, as a deemed dividend under Division 7A of the ITAA 1936), it does not trigger the CDF rules.
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Bankruptcy Act: The forgiveness of a debt due to acts relating to bankruptcy (under the Bankruptcy Act 1966) applies only to individuals. Companies are excluded as their debt forgiveness during liquidation isn't governed by bankruptcy-related legislation.
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Bequests in Wills: Debts forgiven through the terms of a will are exempt from the CDF rules.
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Natural Love and Affection: If a debt is forgiven out of natural love and affection, it does not fall under the CDF rules. This applies irrespective of whether the creditor is a natural person or a corporate entity.
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Tax-Related and Civil Penalties: Forgiveness of tax-related liabilities (such as income tax, GST, or superannuation charges) or civil penalties under Division 290 of the Taxation Administration Act 1953 are also exceptions.
Special Note on Natural Love and Affection
There has been debate over whether this exemption can apply to companies or trustees, as they are not natural persons. However, the law specifies that the forgiveness must be motivated by "natural love and affection," without requiring the creditor to be a natural person. This means that entities can also be considered under this exception.
For further assistance or to discuss specific cases, feel free to contact Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our online calendar.
