• Service: Tax, International Tax
  • Type: Regulatory update
  • Date: 10/3/2013

Australia - Effect of debt forgiveness on infrastructure transfers 

October 3:  With recent and/or proposed divestments of various infrastructure assets in Australia, entities need to give careful consideration as to how the commercial debt forgiveness rules may apply to these transactions.

In circumstances when the vendor is in receivership and debt is trading at a significant discount to face value, there is a risk that the vendor will be unable to fully repay its debts and that the commercial debt forgiveness rules may be triggered prior to completion of the transaction.

The debt forgiveness rules require the vendor to reduce its tax attributes by the forgiven amount in a specified order. Once the forgiven amount has been applied against the vendor’s losses, the residual amount is applied to the maximum extent possible against remaining tax attributes. In infrastructure purchases, the bulk of these attributes are often Division 43 buildings and improvements and, to a lesser extent, Division 40 plant assets.

Subject to satisfying certain criteria, the tax write-down value of buildings and improvements is transferred to the purchaser at the value immediately prior to completion, but there is a risk that the debt forgiveness could significantly reduce the tax base of Division 43 assets available to the purchaser.

Read an October 2013 report prepared by the KPMG member firm in Australia: Protecting infrastructure transactions from debt forgiveness

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