The debt forgiveness rules are being widened

The debt forgiveness rules set out a waterfall of adverse tax consequences that are triggered where debt is forgiven or capitalised.

24 Feb 2022 1 min read 2022 Special Edition Budget Speech Alert Article

To apply these rules, the debtor needs to identify what the forgiven debt was used for. For example, if the debtor used the proceeds of the debt to fund operational expenditure and claimed an income tax deduction for such expenditure, the debtor must recoup the income tax deduction. Likewise, if the debtor used the proceeds of the debt to acquire a fixed asset which is written off annually for tax purposes, the debtor must recoup the wear and tear allowances.

According to the 2022 Budget Speech, there is a perceived gap in these rules in relation to assets that were sold in previous years, and where the debtor claimed a scrapping allowance or realised a capital loss. It has been proposed that the debt forgiveness rules be amended to make it clear that they also apply to the scrapping allowance or capital loss realised upon the disposal of assets in prior years.   

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