The exact nature of these tax consequences for a particular borrower depends on how the borrower used the loan proceeds. For example, if the borrower used the loan to buy a business asset and a wear and tear allowance was claimed on the cost of the asset, the borrower must recoup the wear and tear allowance in the year the debt is forgiven, and the remaining tax value of the asset must be reduced to nil.

The legislation provides for specific circumstances where these adverse tax consequences do not apply. One of these circumstances is where the debt is owed by a company to another company which falls into the same group of companies, and the borrower company has not carried on trade for two years before the debt is forgiven.

However, this relief is denied where the borrower company used the loan to buy an asset, and the borrower transferred the asset to another company within the same group under the corporate rollover relief rules. These rules allow for tax-free transfers of assets within a group of companies.

There is some uncertainty on how to interpret this: Is the relief denied where the debt is forgiven after the asset was transferred under the corporate rollover relief rules, or is it denied where the debt is forgiven before the asset is transferred under the corporate rollover relief rules?

The policy intention was that the relief would be denied in both circumstances. The Minister has proposed that the legislation be amended to make this clear.