Yahoo Finance ATO backtracks on a rule that allowed debts to be forgiven out of “natural love and affection”
The Australian Tax Office has changed its mind about a rule that allowed companies to wipe the debts of family and friends out of, well, love.
Since the mid-1990s, the ATO had guidance that said companies could forgive corporate debt due to “reasons of natural love and affection”.
But this guidance was removed on 6 February this year.
The changes could affect a married couple that are divorcing.
“Certainly where couples are divorcing or separating their financial affairs, it is often necessary to wipe debt between them or between entities such that they can have financial separation,” accounting firm Pilot Partners director of taxation services Murray Howlett told the AFR.
“For many years, advisers have relied upon the fact that even though in divorce some of the love and affection is not there anymore, that the exemption would generally cover off to ensure you don’t have to worry about those provisions.”
The changes don’t just affect family debts but also impact arrangements between businesses and family trusts.
“The effect is that people could, as part of separation, forgive debts between entities without having to worry about debt-forgiveness tax rules.
“Now you’re going to have to be far more careful. I’d go so far as to say forgiveness of debt is probably no longer something I’d be suggesting. Instead they’ll have to think about whether the debt can be assigned to the other spouse or otherwise dealt with,” Howlett said.
“There was a concern within the Tax Office and legislators that people could transmit wealth that way, outside the tax system, and maybe that wasn’t right.”
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