What are the tax consequences of forgiving a debt in Queensland?

You have the legal right to choose not to pursue a debt owed to you. However, before you formally write off or forgive a loan, you must carefully consider the potential tax and Centrelink implications.

The consequences of forgiving a debt depend heavily on who made the loan and the relationship between the parties.

Loans Between Individuals

For purely private, non-commercial loans between individuals (debts with no connection to income-producing activity), the CGT and commercial debt forgiveness provisions generally do not apply — meaning the lender typically has no CGT event and the borrower has no taxable income from the forgiveness.

However, there is a significant Centrelink consideration. Centrelink may treat the forgiven debt as a “gift.” If you are receiving or plan to apply for the Age Pension, this deemed gift could severely impact your entitlements under the deprivation rules. Note that Centrelink’s gifting rules only activate where the forgiven amount exceeds $10,000 in a single financial year or $30,000 over five financial years — smaller forgiven debts may not trigger any pension impact.

Loans Involving Companies or Trusts

Where either party is a company (particularly a private company), Division 7A of the Income Tax Assessment Act 1936 (Cth) may deem the forgiven amount a dividend, with significant tax consequences. Always obtain accounting advice before forgiving any debt involving an entity rather than an individual. The tax rules become significantly more complex:

• Commercial Debt Forgiveness Rules: The ATO may apply the commercial debt forgiveness provisions, which can affect the borrower’s tax losses and asset cost bases.
• Division 7A: As mentioned, if a private company forgives a debt owed by a shareholder or their associate, the forgiven amount may be treated as an unfranked dividend, resulting in a substantial tax bill for the borrower.

Seek Professional Advice

Once you forgive a debt, you cannot legally “unforgive” it. Because the financial consequences can be severe, it is vital to obtain proper accounting and legal advice before taking action.

If you proceed, you should document the process formally using a Deed of Forgiveness to ensure the ATO or other authorities have a clear record of the transaction.

Related Topics

• What is a deed of forgiveness?
• What must a personal loan agreement include?

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1. Income Tax Assessment Act 1997 (Cth)
2. Social Security Act 1991 (Cth)