The ATO withdrew its long-standing Interpretative Decision 2003/589 in February this year, which dealt with circumstances where a company can forgive a debt owed for reasons of “natural love and affection” and not trigger consequences under the commercial debt forgiveness rules.

Little reason was given for the withdrawal of ATO ID 2003/589, other than declaring that the incumbent legislation did not specify that a creditor that forgives a loan must be a natural person, and that ID 2003/589 no longer represented the ATO view and that it would develop “guidance” on this issue.

Now the time has come that guidance has come out, in the form of a draft tax determination issued on the subject of commercial debt forgiveness — TD 2019/D9.

The draft determination shows that the ATO has changed its mind, and that “natural love and affection” can only be provided by a living breathing human being. “The context of paragraph 245-40(e) requires a direct causal nexus between the forgiveness and the natural love and affection, and the natural love and affection must arise in consequence of ordinary human interaction. For this to occur, the creditor must be a natural person,” the TD says.

The view encompasses any entity other than the flesh and blood kind — therefore a trustee of a trust, acting on their fiduciary role, also cannot make use of a natural love and affection exception.

This change to a 16-year-old position therefore seems to look to deflect the underpinning “affection” in a debt forgiveness away from the ultimate individual that such a decision could be traced to through a creditor.

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