The ATO’s apparent change of opinion regarding the ability for companies to forgive debts “for reasons of natural love and affection” will change the way that property settlements occur.
The withdrawal of their non-binding interpretation indicates not only the change of the ATO’s opinion, but that it may never have been valid to begin with, undoing 15 years of reliance on their position.
This potentially retrospective withdrawal of a heavily relied upon publication creates uncertainty, particularly in the marriage breakdown space, for future and even past transactions.
Commercial debt forgiveness rules
The commercial debt forgiveness rules were introduced in 1996 to resolve a perceived disparity in tax consequences on the forgiveness of loans. As creditors were largely recording tax or capital losses for the forgiven amounts, the legislation introduced reductions in tax losses, deductions and cost bases for debtors who were party to the forgiven loans. One exemption to the legislation is where the loan is forgiven by the creditor “for reasons of natural love and affection”.
Whilst it has been widely accepted that natural love and affection can exist between individuals, the same premise does not hold for entities. In 2003 the ATO published their own interpretation on the matter (ATO ID 2003/589), declaring that they believed that the legislation does not specify that the creditor forgiving a loan must be a natural person. The interpretation provided clarity in arguments for entities forgiving debts, and particularly in the marriage breakdown space, has allowed family groups to resolve asset splitting/sharing issues.
On 6 February 2019 the ATO withdrew ATO ID 2003/589, advising that the position stated in this interpretation no longer represents the ATO’s view and that further guidance is under development. The reasons behind the withdrawal and the ATO’s current view are unknown.
What can we do now?
Advisors will need to tread carefully until more clarity is provided from the ATO. In the meantime, alternatives to forgiving debts will need to be considered, particularly where entities are involved.