There is always a focus by corporates on capital management strategies. With the recent reduction in the safe harbour limit under the thin capitalisation rules, we have seen a marked increase in a broad group of transactions termed debt/equity swaps.
These types of transactions inevitably require the consideration of the debt forgiveness rule. All good advice on this topic requires initial consideration of whether the debt forgiveness has revenue implications (refer Warner Music case).
Where not caught by this doctrine, and after satisfying the preliminary debt forgiveness criteria, section 245-37 of the Income Tax Assessment Act 1997 (ITAA 1997), is the primary focus. To apply, the creditor must be the subscriber of the share and if not, this provision is not operative.
However, we recently had cause to consider section 245-45 of ITAA 1997, where the debtor and creditor entered into an arrangement that results in a debt being forgiven. This provision can apply where the more standard transactions are not caught.
If you have or are considering debt equity swaps, this is a section that should not be overlooked.