Despite the general rule that the CDF rules apply where a commercial debt has been forgiven, S.245-40 provides for six circumstances under which the forgiveness of a debt will not be subject to the CDF rules. These exceptions are:
- Where the forgiveness of the debt constitutes a fringe benefit within the FBT Act (e.g., a debt waiver fringe benefit).
- Where the debt has been, or will be, included in the debtor’s assessable income in any year of income (e.g., a deemed dividend under Division 7A of the ITAA 1936).
- Where the forgiveness of the debt is brought about by an Act relating to bankruptcy, such as under the Bankruptcy Act 1966 which currently only has application to individuals. Therefore, companies whose debt is extinguished because it was released during liquidation do not qualify under this exception as it does not occur under an Act related to bankruptcy.
- Where the forgiveness of the debt is the result of a Will.
- Where the forgiveness of the debt is for reasons of natural love and affection.
- Where the debt is a tax-related liability (e.g., an income tax, FBT, GST and superannuation guarantee charge liability owing to the Commissioner) or a civil penalty under Division 290 in Schedule 1 to the Taxation Administration Act 1953.
The ‘natural love and affection’ exception
Historically, there have been questions raised as to whether or not this particular exception can be applied in the context of a company or trustee (i.e., where the relevant entity is not a natural person). Specifically, S.245-40(e) provides that the CDF rules do not apply to a forgiveness of a debt if “the forgiveness is for reasons of natural love and affection”.
Clearly, a literal reading of the wording of the legislation would indicate that there is no specific requirement for the creditor to be a natural person. Rather, the provision merely stipulates that the reason for the forgiveness be ‘natural love and affection’.