Commercial debt forgiveness provisions apply to debts forgiven after 27 June 1996. Under these rules, a forgiven amount can reduce your carried forward revenue losses, carried forward capital losses, deductible expenditure or cost base and reduced cost base of assets.

However, there are several exclusions from the debt forgiveness provisions including debts forgiven for reasons of 'natural love and affection'.

The Commissioner of Taxation's view on debts forgiven for reasons of natural love and affection has recently changed conflicting with an earlier Interpretative Decision.

On 2 October 2019, the Commissioner released draft Tax determination TD 2019/D9 Income Tax: commercial debt forgiveness - does the exclusion for debts forgiven for reasons of natural love and affection require that the creditor be a natural person? outlining the view that debts forgiven for the reasons of natural love and affection require the creditor to be a natural person.

It is now the Commissioner's opinion that natural love and affection is a human quality that cannot extend, in this context, to non-individual creditors such as companies or an individual acting as the trustee of a trust.

This view is different from the Commissioner's interpretative decision ID 2003/589 Commercial debt forgiveness - can a company forgive a debt for reasons of natural love and affection? that was withdrawn on 6 February 2019. The withdrawn ID dealt with circumstances where a company could forgive a debt owed for reasons of natural love and affection and not trigger consequences under the commercial debt forgiveness rules.

The final Determination is proposed to apply before and after the date of issue. However, it will not apply to Taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue. Further to this, TD 2019/D9 states the Commissioner will 'not devote compliance resources' to debts forgiven prior to 6 February 2019. However, if the Commissioner is asked to state a view such as in a private ruling or in submissions in a litigation matter, the Commissioner will do so consistently with the views set out in the final Determination.

Based on the change in the Commissioner's view where loans have been forgiven after 6 February 2019, Taxpayers should seek advice to determine if the commercial debt forgiveness rules may apply. If you believe these changes affect you and wish to discuss the above further, please do not hesitate to contact us.

We note the ATO seek comments on TD 2009/D9 by 1 November 2019.