Debt forgiveness for tax purposes
August 7, 2020
The ATO has clarified its position on loans that have been put on hold during COVID-19.
A debt is considered as being forgiven for tax purposes if, generally:
- the debtor is somehow relieved from the legal obligation to repay it, or
- there is evidence that the creditor will not insist on repayment or rely on the obligation for repayment.
If a creditor only postpones an amount payable and the debtor acknowledges the debt, a debt is not considered forgiven. This is unless there is evidence that the creditor will no longer rely on the obligation for repayment.
If a private company forgives a debt, it is considered a deemed dividend under Div 7A of ITAA 1936. A debt is forgiven if a reasonable person would conclude that a creditor would not insist on payment or rely on the borrower’s obligation to pay.
Without more, allowing more time to repay a debt due to COVID-19 will not result in the debt being treated as forgiven.