Tuesday, September 28, 2021

Division 7A and (un)forgiven** debts

Where a debt owed by a taxpayer to a company is forgiven, this will generally trigger the operation of Division 7A. This means that the amount will be included in the assessable income for the debtor as a dividend in the year the forgiveness occurs.

Importantly, as the amount will be neither a payment nor a loan, it is not possible to rely on the more standard approach to comply with Division 7A of repaying the balance with the requisite amount of statutory interest.

One way in which a debt can be forgiven is pursuant to the rules that cause debts to become statute barred.

In most states, a debt that is not secured will become automatically unrecoverable after six years, unless steps are taken to acknowledge the existence of the loan.

The Tax Office in practice statement LA 2006/2 confirmed that it did not intend to apply the provisions of Division 7A to loans that became statute barred where the loans were originally made prior to the commencement of Division 7A.

While in the context of Division 7A (given that it was introduced in 1997), there should not be many situations where the issue remains relevant, for loans otherwise not caught by Division 7A, the automatic forgiveness caused by the provisions of the statutes of limitations in each state are often highly relevant.

** for the trainspotters, the title today is riffed from the Metallica song ‘The unforgiven’. View hear (sic):