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Debt forgiveness – Is it really that scary?
Published on 01 Jun 14 by "TAXATION IN AUSTRALIA" JOURNAL ARTICLE
In the SME environment, a business is often conducted via one or more separate legal entities, all of which are controlled by the same person or group of people. Frequently, the adviser considering the tax aspects of the forgiveness of a debt must consider the effect of forgiveness on both debtor and creditor. The creditor may want to write the debt off and claim a deduction or capital loss. The debtor may wish to avoid gaining assessable income. Usually, debt forgiveness will not constitute ordinary income and the commercial debt forgiveness provisions in Div 245 of the Income Tax Assessment Act 1997 may apply.
The operational provisions of the Division describe how to quantify the relevant forgiven amounts and the application of those amounts to reduce a company’s or related company’s tax attributes. This article focuses initially on the position of the debtor but goes on to consider some of the issues the creditor may face.
Author profile
Julie Van der Velde CTA
Julie Van der Velde, CTA TEP is the principal of a specialised commercial law firm, VdV Legal. With over 25 years’ experience advising Australian businesses, her practice focuses on taxation and trust law with an emphasis on business structuring, tax planning, business succession and intergenerational transfers. Julie is The Tax Institute’s SME Chartered Tax Adviser for 2017 and a regular speaker for the Tax Institute and other professional organisations. - Current at 25 November 2025
The Tax Institute is Australia's leading professional association and educator in tax providing the best resources, professional development and networks.