CFM35570 - Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: the 'new; corporate rescue exemption from S361

CTA09/S361D

S361D applies for acquisitions of impaired debt on or after 18 November 2015.

The ‘new’ corporate rescue exception from S361

No deemed release arises under CTA09/S361 on the acquisition of impaired debt by a connected creditor where the corporate rescue exception applies.

This exception applies where:

  • Within 60 days after the creditor company (‘C’) becomes party to the loan relationship, C or a company connected with C releases the debtor (‘D’) from its liability to pay an amount, and
  • The corporate rescue conditions are met.

The corporate rescue conditions are:

  • The acquisition by C of the rights under the loan relationship is an arm’s length transaction, and
  • Immediately before C acquired the rights, it was reasonable to assume that without the release, there would be a material risk that at some time within the next 12 months, D would have been unable to pay its debts.

The legislation defines “unable to pay its debts” as being where:

  • D is unable to pay its debts as they fall due, or
  • The value of D’s assets is less than its liabilities, taking into account contingent and prospective liabilities.

S361D follows the same approach as that taken with the corporate rescue exception applying for actual debt releases (CTA09/S322(5B)). See CFM33191 onwards for detailed explanation of how the conditions should be applied.

Effect

The way in which the exception works depends on whether C releases D from the full liability under the loan relationship, or part of the liability.

Where C releases D from the full liability, S361 does not apply to the original acquisition of the rights under the loan relationship by C. So there is no taxable release of rights on the acquisition.

Where C releases D from part of the liability, the amount treated as released by S361 is reduced by the amount that is actually released. Note that this cannot reduce the amount of the release below nil, so C cannot create a deductible amount.

When the creditor subsequently releases the debtor from the debt, there is no tax charge on a ‘release of relevant rights’ (CFM35520). The group is therefore in the same position as if the debtor company had been released from the debt as part of a qualifying corporate rescue under CTA09/S322(5B).