What is a Deed of Debt Forgiveness?
The Borrower owes you money. In the Deed of Debt Forgiveness, you forgive Family Trust UPEs for 'love and affection'. The debt has gone. The borrower no longer owes the lender any money.
Forgive Family Trust UPEs - Unpaid Present Entitlements
Your Family Trust distributes $30,000 to your daughter each year for 10 years. Your Family Trust pays the tax of $2,000 per year on behalf of your daughter. Therefore, there is an 'Unpaid Present Entitlement' (like a debt). Your Family Trust owes your daughter $280,000. An 'Unpaid Present Entitlement' is the money that the Family Trust owes the beneficiary. You can now forgive Family Trust UPEs using a Deed of Debt Forgiveness.
Your daughter, of course, never gets any of this money. You just used her low marginal tax rates to pay less tax. Your accountant reminds you that your daughter (or her ex-husband or trustee in bankruptcy) can now ask for that money. After all, it is her money.
To get rid of the debt she signs a Deed of Debt Forgiveness. There are no tax issues when forgiving the debt. Get her to sign the same Deed of Debt Forgiveness each financial year. Therefore, if your daughter goes bankrupt, feral, divorces or dies your Family Trust owes her nothing.
Have a son? Have other children? Distributed to yourself? Build a separate Deed of Debt Forgiveness for each of you.
Income Tax implications
Issues when you forgive a debt for 'love and affection':
* is a deduction for the release of debt is available?
* do the commercial debt forgiveness penalties apply?
* any FBT?
The answer to all questions is 'no'. See the Sample to read our letter of advice.
Commercial Debt Forgiveness and 'love and affection'
Division 245 ITAA 1997 sets out the tax for a debtor. This is when a commercial debt is forgiven.
However, a debt that is forgiven for 'natural love and affection' is excluded (section 245-40). Our Deed of Debt Forgiveness is drafted by us on that basis.
When do Reimbursement Agreement rules apply to debt forgiveness?
We do not use Reimbursement Agreements to forgive debts. They don't work. See the Sample above to read our letter of advice on this point.
This document works for:
1. when a child forgives a debt owed by a parent
2. when a parent forgives a debt owed by a child
3. when a person (human or company) forgives a debt that a company owes it
4. when a company (not as a trustee, but a company in its own right) forgives a debt owed by another company to it
5. when a beneficiary (other than a company) forgives the debt that the Family Trust owes the beneficiary (forgiving a UPE)
What about Division 7A Loans?
This does not cover when a human or trust owes money to a company. That is probably a Division 7A loan that you should not forgive. Get your accountant or financial planner to telephone us.
Any Stamp Duty?
You do not need to lodge this document in the ACT, WA, VIC, NSW, TAS, NT, QLD or SA. There is no duty payable in those States.
How do I record forgiveness of debt in the accounts?
When you build the Deed of Forgiveness you get a letter of advice. Forgiving the debt is neither income nor a taxable capital gain. It has no tax consequences. The forgiven amount ends up in the trust corpus. For the accounts, to be true and useful, the accounts should reflect this. The letter of advice sets out the Journal Entries.
For more legal advice telephone us. We are a law firm. We can help you answer the questions.
Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
ption: 08 6389-0100