The Public Ruling BR Pub 99/7 commentary highlights the extensive range of practical matters likely to have arisen for the period up to the introduction of the new section EH 5 on forgiveness of debt and while not a legally binding statement very effectively carries out its stated intention of providing assistance in understanding and applying the conclusions reached.
The Ruling applies in respect of section EH 4(6) of the Income tax Act 1994 (prior to the enactment of the Taxation (Accrual Rules and Other Remedial Matters) Act 1969) and applies for the period 1 April 1997 to 19 May 1999. It focuses on BR Pub 99/7 which applies for the period 1 April 1997 to 19 May 1999 and emphasises that it does not replace BR 96/4A which applies from the 1997-98 year to 19 May 1999. Importantly it makes it clear that that in consequence taxpayers with standard, early or late balance dates for these years are able to rely on either ruling during the period that both apply.
In an in-depth treatment some 10 examples are analysed in detail and these would appear to cover most areas of major concern commented on by practitioners. The requirements of section EH 4(6) are conveniently summarised and then each of the "keywords" or "phrases" is commented upon with cross referencing and where appropriate provides helpful ordinary or common meaning definitions. Thus useful guidance is available as to the meaning of "financial arrangement", "debt", "forgiven" "partial and conditional forgiveness" and the phrase "in consideration of natural love and affection". In not all cases is the answer provided necessarily the last word, but the comprehensive coverage makes it highly likely that it will suffice for most purposes. Thus while it is generally clear that "natural love and affection" is confined to family and other private transactions rather than to business or commercial arrangements it seems that the Commissioner considers that in some cases it would be possible for general love and affection to be present outside the family for example it could be present between close friends (although not ordinary acquaintances or colleagues). Each question can only be considered on a case by case basis. There can be no detailed rules or guidelines, but relevant factors are nevertheless conveniently highlighted. A television advertisement suggests that "lifelong" friends may become "close" friends "one day" whereas it can be imagined that an acquaintance who rescues a child may be considered a "close" friend almost instantaneously so clearly the element of "time" is only a factor to be considered.
Family Trusts - The Commissioner considers that it is necessary to "look through" the trust from the creditor to the beneficiaries in determining whether there is natural love and affection. In this regard the presence or that state as between "the creditor" and "the trustee" and as between "the trustee" and "the beneficiaries" is irrelevant. However, the state must exist, or have existed, between the natural person creditor and all of the trust’s beneficiaries. In this regard it is suggested that certain non-qualifying beneficiaries, such as charities, can be "default" beneficiaries and it is further suggested that the terms of the trust may include a power to add objects or beneficiaries for whom a creditor could not have natural love and affection without precluding the section from applying to a forgiveness of debt if (but only if) that discretion has not been exercised.
Along with other commentators the article states that in the case of a discretionary trust the position is less clear where the class of persons includes persons for whom the settlor or other creditor has natural love and affection. While the section does not mention all beneficiaries the commissioner’s view is that the section will apply when either all (or at least all of the primary beneficiaries) fall within the necessary category.
A useful discussion of the similarities between family companies and family trust arrangements is provided again with referencing to published material. Not too many practitioners will argue with the view of commentators that a forgiveness to a company or other non-natural person is not and should not be considered in consideration of natural love and affection.
Superannuation schemes as trust beneficiaries
While the article makes it clear that a superannuation scheme may be one of the beneficiaries of a trust as long as the superannuation scheme is a trust established by its deed to provide retirement benefits to persons for whom a creditor has natural love and affection in fact many draftsmen find it preferable to delete reference to superannuation schemes as it is not always conveniently possible to be sure of their precise terms and there is the fear that inclusion as a prime beneficiary may taint the deed.
Charities as beneficiaries
Natural love and affection cannot be held for a charity so family trust deeds now routinely exclude provisions to include charities.
General Comments
The article concludes by addressing in a practical way various submissions received from practitioners and others in response to its initial draft. In doing so it substantially addresses many of the "concerns" raised over time by individual observers.. For example it is now accepted that the reference to "near relatives" and "close friends" was too narrow an interpretation of the objects of a person’s natural love and affection and the current draft ruling now refers to "relatives" and expands on the examples. In addition to the general comments itemised it is perhaps also worth rememembering that:
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