On 6 February 2019, and as previously reported here, the Australian Taxation Office (ATO) withdrew its longstanding public guidance that a company could forgive a debt for “natural love and affection” under the exception in the commercial debt forgiveness rules (CDF Rules) in Division 245. At that time, the ATO said it is developing guidance on the issue.
On 2 October 2019, the ATO released draft Tax Determination TD 2019/D9, which states that only a natural person creditor (lender) can forgive a debt for natural love and affection and access the exception under the CDF Rules.
The shift in the ATO’s views from those pre-6 February 2019 represents a narrower interpretation of what is “natural love and affection”. That is, “natural love and affection” is a human quality that cannot extend, in this context, to non-individual creditors such as companies or individuals acting as trustees (because the fiduciary relationship governs decisions by the trustee).
Even if the creditor is an individual acting in an individual capacity, as the ATO says in TD 2019/D9, the drafting of the exception in the CDF Rules requires that there must be a direct causal connection between the forgiveness and the love and affection.
As noted previously, the “natural love and affection” exception in the CDF Rules does not apply to the debt forgiveness provisions in Division 7A.
The ATO has for many years been developing guidance on section 100A including the “ordinary family and commercial dealing” exception to that provision. Whether the views on what constitutes “natural love and affection” plays out in the ATO views on “ordinary family and commercial dealing” is an unanswered question.
If you wish to discuss the TD 2019/D9, or require advice on the CDF Rules, please contact one of our experts.