Forgiving Debts In a Will

In their Will a deceased may forgive debts owing to the deceased by third parties including friends and relatives. The forgiveness of a debt would not ordinarily give rise to assessable income and would not be income according to ordinary principles when done via a Will.

It is necessary to make sure that the forgiveness does not fall foul of the commercial debt forgiveness rules in Div 245 Schedule 2C of the 1936 Tax Act. The effect of these rules is not to assess the economic benefit of the debt forgiven to the debtor but to deny future income tax benefits.

The commercial debt forgiveness rules normally do not apply where forgiveness is effected by a Will.

If the deceased’s estate includes among its assets the shares in a private company, the executor may be able to get the company to forgive a loan owing to the company by an individual beneficiary of the estate.

The forgiveness by the company does not fall within the exception to the commercial debt forgiveness rules and may give rise to a deemed dividend under s.109F of the 1936 Tax Act.

Also note that the forgiveness of a loan would likely be a “relevant property transaction” under the Succession Act and could give rise to a notional estate order that could see the debt taken into account in a family provision order effectively changing the deceased’s Will.

Of course, if the amount of the loan is greater than the child’s share of the estate the testator could forgive that part of the loan up to the child’s share and bequeath the remainder of the loan to another desired beneficiary.

If you would like to forgive a loan in a Will, check with TOWNSENDS BUSINESS & CORPORATE LAWYERS first by calling (02) 8296 6222.