Commercial debt forgiveness stance to impact property settlements

A recent Australian Taxation Office (ATO) announcement which no longer allows companies to forgive debts ‘for reasons of natural love and affection’ will have profound implications on the way that property divorce settlements occur.

Earlier this month the ATO released its draft tax determination on the commercial debt forgiveness rules, eight months after it announced its intention to withdraw their previous guidance around commercial debt forgiveness saying ‘it no longer represented the ATO’s view.’

Commercial debt forgiveness rules were introduced in 1996 to resolve a perceived disparity in tax consequences on the forgiveness of loans.

Pilot Partners’ head of taxation, Murray Howlett, said up until now they were commonly used in business break-ups and family law cases to mitigate the tax implications of separation.

One exemption to the legislation was where the loan could be forgiven by the creditor “for reasons of natural love and affection” in situations which could include a husband and wife divorcing or debts owed between family and friends or parents and children.

The ATO has now taken the stance that the creditor forgiving the loan must be an individual and not a company or an individual acting in the capacity of a trustee.

Advisors now need to be far more careful and look for alternatives to forgiving debts, particularly where entities are involved. Forgiveness of debt is no longer a simple, low risk alternative. Instead consideration of other options, such as whether the debt can be assigned to the other spouse or otherwise dealt with, may be required.

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If you have any questions on this topic, or need some help as to what to do now, please contact Murray Howlett on 07 3023 1300 or at