CGT and Debt Forgiveness

A debt is forgiven if you are freed from the obligation to pay it. A debt is a commercial debt if part or all of the interest payable on the debt is, or would be, an allowable deduction. Commercial debt forgiveness rules apply to debts forgiven after 27 June 1996. Under the commercial debt forgiveness rules, a forgiven amount may reduce (in the following order) your:

  • previous income year revenue losses
  • net capital losses from past years
  • deductible expenditure
  • cost base and reduced cost base of assets.

These rules do not apply if the debt is forgiven:

  • as a result of an action under bankruptcy law
  • in a deceased person’s will, or
  • for reasons of natural love and affection.

Example

On 1 July 2014, Josef had available net capital losses from earlier years of $9,000. On 3 January 2015, he sold shares he had owned for more than 12 months for $20,000. They had a cost base (no indexation) of $7,500. On 1 April 2015, a commercial debt of $15,000 that Josef owed to AZC Pty Ltd was forgiven. Josef had no prior income year revenue losses and no deductible capital expenditure.

Josef must use part of the forgiven commercial debt to wipe out his net capital losses from earlier years and the rest to reduce the cost base of his shares. He works out the amount of net capital gain to include in his assessable income as follows:

Adjust net capital losses from earlier years:
Available net capital losses from earlier years$9,000
less debt forgiveness adjustment$9,000
Adjusted net capital losses from earlier yearsNil
Adjust cost base:
Cost base of shares (no indexation)$7,500
less debt forgiveness adjustment$6,000
Adjusted cost base (no indexation)$1,500
Calculate net capital gain:
Sale of shares$20,000
less adjusted cost base (no indexation)$1,500
less adjusted net capital losses from earlier yearsNil
Capital gain (eligible for discount)$18,500
less discount percentage (50%)$9,250
Net capital gain$9,250


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