ATO’s new view in TD 2019/D9
On 2 October 2019, the ATO released draft Taxation Determination (‘TD’) 2019/D9 to outline its current view on whether or not the natural love and affection exception requires the creditor to be a natural person.
In a complete reversal of its previous longstanding view, the ATO has stated in TD 2019/D9 that the natural love and affection exception can only operate where the creditor is a natural person. The ATO has indicated that there must be a direct causal nexus between the forgiveness and the natural love and affection and that the natural love and affection must arise in consequence of ordinary human interaction.
In other words, the ATO is effectively saying that the ‘natural love and affection exception’ in S.245-40(e) can only apply where the creditor feels the natural love and affection. Therefore, it is now the ATO’s view that natural love and affection is a human quality that cannot extend, in this context, to non-individual creditors. In doing so, the ATO is rejecting any argument that the natural love and affection underpinning the forgiveness can effectively be traced through the creditor, to the ultimate individual (e.g., the director of a creditor company).
Whether a debt has been forgiven for reasons of natural love and affection requires a careful examination of the reasons for forgiving the debt, which is ultimately a question of fact. All the surrounding circumstances of the debt must be taken into account, together with the nature of the relationship that is said to be the subject of the natural love and affection.
The ATO has identified three elements of the exception, the interaction of which is important:
- First element – there must be a ‘forgiveness of a debt’.
- Second element – the words ‘for reasons of’ requires a causal nexus between the first and third element.
- Third element – the phrase ‘natural love and affection’ can be characterised as a limitation on the first element.
In relation to the first element, the ATO has stated that, when the provisions are read in context, it indicates that the reasons of natural love and affection must be those of the creditor.
With respect to the ‘causal nexus’ referred to in the second element, there is a requirement that the forgiveness of the debt be because of the natural love and affection. That is, it is not enough to simply have a debt forgiven and the existence of natural love and affection. Rather, the natural love and affection must act as the contributory factor in the decision to forgive the debt.
In terms of the third element, the ATO notes that the ordinary meaning of the phrase ‘natural love and affection’ “… imports strong emotions of caring, fondness and attachment that arise in consequence of ordinary human interaction”. In addition, the ATO notes that the legal meaning of the phrase “… refers to goodwill towards, or emotional attachment to, another person, particularly that of a parent to their children”. Refer to paragraph 12 of TD 2019/D9.