Loans put on hold and debt forgiveness: ATO’s views

The ATO has “clarified” its position on loans put on hold during COVID-19. The ATO will consider a debt to be forgiven for tax purposes if:

• the debtor is somehow relieved from the legal obligation to repay it; or
• there is evidence that the creditor won’t insist on repayment or rely on the obligation for repayment.

A debt is not considered to be forgiven if a creditor only postpones an amount payable and the debtor acknowledges the debt – unless there is evidence that the creditor will no longer rely on the obligation for repayment.

The Div 7A implications are specifically spelt out (as a debt forgiven by a private company can be treated as a deemed dividend). For these purposes, a debt is forgiven if a reasonable person would conclude a creditor will not insist on payment or rely on the borrower’s obligation to pay. However, simply allowing more time to repay a debt due to COVID-19 will not result in the debt being treated as forgiven.