Commercial debt forgiveness rules
The loan owing to Sonny is deemed to be a commercial debt where any interest payable on the loan was deductible to Cher. In the event that no interest was payable, the debt is still classified as a commercial debt to the extent any interest expense would have been deductible to Cher. The loan owing to Sonny satisfies this condition as funds from the loan were used to finance the company’s operating activities.
Under the commercial debt forgiveness rules, as a result of the loan forgiveness Cher is prevented from claiming deductions for accumulated revenue and capital losses and other undeducted losses to the extent that these deductions would represent an effective duplication of tax deductions.
The “net forgiven amount” of the debt forgiveness is calculated as the notional value of the debt reduced by the following amounts:
- any consideration given for the forgiveness
- any amount that is included in Cher’s assessable income as a result of the debt forgiveness
- any amount by which a deduction that would otherwise be allowable from Cher’s assessable income is reduced
- any amount by which the cost base of any CGT asset of Cher is reduced as a result of the debt forgiveness.
The net forgiven amount is applied to reduce opening deductible amounts in the following order:
- deductible revenue losses
- deductible capital losses carried forward from previous income years
- deductible expenditure including expenditure relating to depreciable plant and capital works
- the cost base of certain assets.
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