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Debt Assignment: How They Work, Considerations and Benefits

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Ryan Oakley

What Is Debt Assignment?

The term debt assignment refers to a transfer of debt , and all the associated rights and obligations, from a creditor to a third party. The assignment is a legal transfer to the other party, who then becomes the owner of the debt. In most cases, a debt assignment is issued to a debt collector who then assumes responsibility to collect the debt.

Key Takeaways

• Debt assignment is a transfer of debt, and all the associated rights and obligations, from a creditor to a third party (often a debt collector).
• The company assigning the debt may do so to improve its liquidity and/or to reduce its risk exposure.
• The debtor must be notified when a debt is assigned so they know who to make payments to and where to send them.
• Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), a federal law overseen by the Federal Trade Commission (FTC).

How Debt Assignments Work

When a creditor lends an individual or business money, it does so with the confidence that the capital it lends out—as well as the interest payments charged for the privilege—is repaid in a timely fashion. The lender , or the extender of credit , will wait to recoup all the money owed according to the conditions and timeframe laid out in the contract.

In certain circumstances, the lender may decide it no longer wants to be responsible for servicing the loan and opt to sell the debt to a third party instead. Should that happen, a Notice of Assignment (NOA) is sent out to the debtor , the recipient of the loan, informing them that somebody else is now responsible for collecting any outstanding amount. This is referred to as a debt assignment.

The debtor must be notified when a debt is assigned to a third party so that they know who to make payments to and where to send them. If the debtor sends payments to the old creditor after the debt has been assigned, it is likely that the payments will not be accepted. This could cause the debtor to unintentionally default.

When a debtor receives such a notice, it's also generally a good idea for them to verify that the new creditor has recorded the correct total balance and monthly payment for the debt owed. In some cases, the new owner of the debt might even want to propose changes to the original terms of the loan. Should this path be pursued, the creditor is obligated to immediately notify the debtor and give them adequate time to respond.

The debtor still maintains the same legal rights and protections held with the original creditor after a debt assignment.

Special Considerations

Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA). The FDCPA, a federal law overseen by the Federal Trade Commission (FTC), restricts the means and methods by which third-party debt collectors can contact debtors, the time of day they can make contact, and the number of times they are allowed to call debtors.

If the FDCPA is violated, a debtor may be able to file suit against the debt collection company and the individual debt collector for damages and attorney fees within one year. The terms of the FDCPA are available for review on the FTC's website .

Benefits of Debt Assignment

There are several reasons why a creditor may decide to assign its debt to someone else. This option is often exercised to improve liquidity  and/or to reduce risk exposure. A lender may be urgently in need of a quick injection of capital. Alternatively, it might have accumulated lots of high-risk loans and be wary that many of them could default . In cases like these, creditors may be willing to get rid of them swiftly for pennies on the dollar if it means improving their financial outlook and appeasing worried investors. At other times, the creditor may decide the debt is too old to waste its resources on collections, or selling or assigning it to a third party to pick up the collection activity. In these instances, a company would not assign their debt to a third party.

Criticism of Debt Assignment

The process of assigning debt has drawn a fair bit of criticism, especially over the past few decades. Debt buyers have been accused of engaging in all kinds of unethical practices to get paid, including issuing threats and regularly harassing debtors. In some cases, they have also been charged with chasing up debts that have already been settled.

Federal Trade Commission. " Fair Debt Collection Practices Act ." Accessed June 29, 2021.

Federal Trade Commission. " Debt Collection FAQs ." Accessed June 29, 2021.

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What is an Assignment of Debt?

By Vanessa Swain Senior Lawyer

Updated on February 22, 2023 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

Perfecting Assignment

• Enforcing an Assigned Debt 

Recovery of an Assigned Debt

• Other Considerations 

Key Takeaways

Frequently asked questions.

I t is common for creditors, such as banks and other financiers, to assign their debt to a third party. Usually, an assig nment of debt is done in an effort to minimise the costs of recovery where a debtor has been delinquent for some time. This article looks at:

• what it means to ‘assign a debt’;
• the legal requirements to perfecting an assignment; and
• common problems with enforcing an assigned debt. 

Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.

This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.

An assignment of debt, in simple terms, is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once a debt is properly assigned, all rights and responsibilities of the original creditor (the assignor ) transfer to the new owner (the assignee ). Once an assignment of debt has been perfected, the assignee can collect the full amount of the debt owed . This includes interest recoverable under the original contract, as if they were the original creditor. A debtor is still responsible for paying the outstanding debt after an assignment. However, now, the debt or must pay the debt to the assignee rather than the original creditor.

Purchasing debt can be a lucrative business. Creditors will generally sell debt at a loss, for example, 20c for each dollar owed. Although, the amount paid will vary depending on factors such as the age of the debt and the likelihood of recovery. This can be a tax write off for the assignor, while the assignee can take steps to recover 100% of the debt owed. 

In New South Wales, the requirements for a legally binding assignment of debt are set out in the Conveyancing Act :

• the assignment must be in writing. You do this in the form of a deed (deed of assignment) and both the assignor and assignee sign it; and
• the assignor must provide notice to the debtor. The requirement for notice must be express and must be in writing. The assignor must notify the debtor advising them of the debt’ s assign ment and to who it has been assigned. The assignee will send a separate notice to the debtor, putting them on notice that the debt is due and payable. They will also provide them with the necessary information to make payment. 

The assignor must send the notices to the debtor’s last known address.  

Debtor as a Joined Party

In some circumstances, a debtor will be joined as a party to the deed of assignment . There can be a great benefit in this approach . This is because the debtor can provide warranties that the debt is owed and has clear notice of the assignment. However, it is not always practical to do so for a few reasons:

• a debtor may not be on speaking terms with the assignor; 
• a debtor may not be prepared to co-operate or provide appropriate warranties; and
• the assignor or the assignee may not want the debtor to be made aware of the sale price . This occurs particularly where the sale price is at a significant discount.

If the debtor is not a party to the deed of assignment, proper notice of the assignment must be provided.  

An assignment of debt that has not been properly perfected will not constitute a legal debt owing to the assignee. Rather, the legal right to recover the debt will remain with the assignor. Only an equitable interest in the debt will transfer to the assignee.  

Enforcing an Assigned Debt 

After validly assigning a debt (in writing and notice has been provided to the debtor’s last known place of residence), the assignee is entitled to take any legal steps available to them to recover the outstanding debt. These recovery options include:

• commencing court proceedings;
• obtaining a judgment; and 
• enforcement of that judgment.

Suppose court proceedings have been commenced or judgment already entered in favour of the assignor. In that case, the assignee must take steps to have the proceedings or judgment formally changed into the assignee’s name.  

In our experience, recovery of an assigned debt can be problematic because:  

• debtors often do not understand the concept of debt assignment and may not be aware that their credit contract contains an assignment of debt clause;
• disputes can arise as to whether a lawful assignment of debt has arisen. A debtor may claim that the assignor did not provide them with the requisite notice of the assignment, or in some cases, a contract will specifically exclude the creditor from legally assigning a debt;
• proper records of the notice of assignment provided to the debtor must be maintained. If proper records have not been kept, it may be difficult to prove that notice has been properly given, which may invalidate the legal assignment; and
• the debtor has the right to make an offsetting claim in defence to any recovery action taken by the assignee. A debtor may raise an offsetting claim which has arisen out of a previous arrangement with the assignor (which the assignee may not be aware of). For example, the debtor may have entered into an agreement with the assignor whereby the assignor agreed to accept a lesser amount of the debt owed by way of settlement. Because the assignee acquires the same rights and obligations of the assignor, the terms of that previous settlement agreement will bind the assignee. The court may find that there is no debt owing by the debtor. In this case, the assignee will have been assigned nothing of value. 

Other Considerations 

When assigning a debt, it is essential that the assignee, in particular, considers relevant statutory limitation periods for commencing proceedings or enforcing a judgment debt . In New South Wales, the time limit:

• to file legal proceedings to recover debts is six years from the date of last payment or when the debtor admitted in writing that they owed the debt; and
• for enforcing a judgment debt is 12 years from the date of judgment.

An assignment of a debt does not extend these limitation periods.  

While there can be benefits to both the assignor and the assignee, an assignment of debt will be unenforceable if done incorrectly. Therefore, if you are considering assigning or being assigned a debt, it is important to seek legal advice. If you need help with drafting or reviewing a deed of assignment or wish to recover a debt that has been assigned to you, contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.  

An assignment of debt is an agreement that transfers a debt owed to one entity, to another. A creditor does not need the consent of the debtor to assign a debt.

Once the assignee has validly assigned a debt, they are entitled to take any legal steps available to them to recover the outstanding debt. This includes commencing court proceedings, obtaining a judgment and enforcement of that judgment.

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Commercial debt forgiveness

Situations where an entity has had a debt forgiven (whether formally or informally) may attract our attention.

Last updated 23 August 2022

Situations that attract our attention include entities that have:

• had a debt forgiven (whether formally or informally)
• a commercial debt forgiven (see Division 245 of the ITAA 1997 – Forgiveness of a commercial debt ), but the gain it represents for the debtor has not been recorded correctly in the tax return
• had a deemed forgiveness that takes place when a debt is assigned to a party related to the debtor
• entered into a debt for equity swap and failed to adjust their loss claims.

For more information on commercial debt forgiveness, see TD 2022/ 1 Income tax: commercial debt forgiveness – does the exclusion for debts forgiven for reasons of natural love and affection require that the creditor be a natural person?

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Assignment of debts, statutory demands and offsetting claims

It is not uncommon for a creditor (assignor) to transfer their right to receive payment of a debt (assignment) to a third party (assignee). The assignee will then seek payment from the debtor.

The assignee of the debt can issue to the debtor company a statutory demand for the payment of the debt if the debt exceeds the statutory minimum, which is currently $2,000.

For the assignee issuing the statutory demand, there will be threshold issues as to whether notice of the assignment has been given to the debtor and whether appropriate details of the assignment are contained in the statutory demand.

Assignee has the same rights and obligations as the assignor

The assignee of the debt takes the assignment subject to the rights and obligations of the assignor.

This was demonstrated in the recent decision of Mascarene Pty Ltd v Slater [2016] VSC 395 relating to a building dispute.

In Mascarene a judgment debt was assigned and the assignee issued a statutory demand.

The Court held that the assignee was not prevented from seeking payment of interest as it had the same rights as the assignor, as if the assignment had not taken place.

However, the assignee also took the assignment subject to the obligations that would have applied to the assignor in respect of the debt.

In seeking to set aside the statutory demand the debtor company claimed it had an offsetting claim against the assignor for reinstatement costs relating to building works.

Although the assignee was not a party to the building contract and not personally liable for the reinstatement costs, the debtor company was successful in claiming the setoff and reducing the amount of the statutory demand by the amount of the reinstatement costs.

It is clear that an offsetting claim cannot be sidestepped by assigning the debt.

The assignee of a debt receives the benefit of the debt subject to the rights of the assignor but also subject to the assignor’s obligations in respect of the debt.

A statutory demand can be issued in respect of an assigned debt however the assignment does not prevent the debtor company from disputing the existence or amount of the alleged debt or seeking to raise an offsetting claim.

If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404.

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Assignment of debts, statutory demands and offsetting claims

Contributor

It is not uncommon for a creditor (assignor) to transfer their right to receive payment of a debt (assignment) to a third party (assignee). The assignee will then seek payment from the debtor.

The assignee of the debt can issue to the debtor company a statutory demand for the payment of the debt if the debt exceeds the statutory minimum, which is currently $2,500.

For the assignee issuing the statutory demand, there will be threshold issues as to whether notice of the assignment has been given to the debtor and whether appropriate details of the assignment are contained in the statutory demand.

Assignee has the same rights and obligations as the assignor

The assignee of the debt takes the assignment subject to the rights and obligations of the assignor.

This was demonstrated in the recent decision of Mascarene Pty Ltd v Slater [2016] VSC 395 relating to a building dispute.

In Mascarene a judgment debt was assigned and the assignee issued a statutory demand.

The Court held that the assignee was not prevented from seeking payment of interest as it had the same rights as the assignor, as if the assignment had not taken place.

However, the assignee also took the assignment subject to the obligations that would have applied to the assignor in respect of the debt.

In seeking to set aside the statutory demand the debtor company claimed it had an offsetting claim against the assignor for reinstatement costs relating to building works.

Although the assignee was not a party to the building contract and not personally liable for the reinstatement costs, the debtor company was successful in claiming the setoff and reducing the amount of the statutory demand by the amount of the reinstatement costs.

It is clear that an offsetting claim cannot be sidestepped by assigning the debt.

The assignee of a debt receives the benefit of the debt subject to the rights of the assignor but also subject to the assignor's obligations in respect of the debt.

A statutory demand can be issued in respect of an assigned debt however the assignment does not prevent the debtor company from disputing the existence or amount of the alleged debt or seeking to raise an offsetting claim.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Debt Assignment in Queensland – A Complete Guide

Home » News & Articles » Debt Assignment in Queensland – A Complete Guide

NEWS & ARTICLES

• By Wayne Davis
• | September 17, 2023

Article Summary

A debt assignment is an agreement where a debt, along with all its associated legal rights and responsibilities, is transferred from the original creditor to a third-party purchaser. Once verified, the third party, now termed the assignee, becomes the official owner of the debt and has the right to collect it.

A “chose in action” or a “thing in action” is a legal term referring to a personal or proprietary right in intangible personal property, enforceable through litigation. This is different from “chose in possession”, or a “thing in possession” which refers to tangible items one can physically possess, like a book or car.

The legislation in Queensland, specifically the Property Law Act 1974 (Qld), provides for assignments of things in action.

An absolute debt assignment refers to the unconditional transfer of property or rights, ensuring the original owner retains no interest. The assignment should be complete for clarity between the debtor and the new creditor.

Before the new creditor can collect the debt, a formal notice must be issued to the debtor. This ensures the debtor knows they have a new creditor. Requirements for a valid notice include it being in writing, signed by the assignor, and containing clear identification of the assignor, assignee, and the debt.

The responsibility of ensuring a valid notice falls on the assignee. Several guidelines and legal cases have highlighted the importance of serving the notice in a manner that is most likely to bring it to the debtor’s attention. This could involve registered post or personal delivery.

Once the debt is effectively assigned and the debtor notified, the assignee can collect the debt and undertake any necessary legal actions. Often, debts that are assigned come with their own challenges, as many are sold precisely because they are problematic.

Legal avenues like court proceedings, enforcement warrants, or bankruptcy can be pursued. Challenges may arise due to misunderstandings by the debtor, disputes about the validity of the assignment, or challenges proving effective delivery of the notice to the debtor.

Table of Contents

Are you a creditor in Queensland who is struggling with debt assignment and is looking for a way to effectively manage the assignment of their debts?

Dealing with debt can sometimes be a lot for creditors to manage. Between the multiple debts that their business will likely manage and potential problem debtors who don’t seem to want to pay their debt, debts can sometimes spiral out of control!

If this is the case for you or your business, it may be time to consider assigning your debt.

The assignment of a debt occurs when the creditor of a debt sells their debt to a third-party buyer. This process can be complicated to understand, so it is important that you perform due diligence and research before engaging in this process.

Typically seen with banks and credit card companies, creditors will sometimes package their debts into debt books or tranches and sell them, rather than collecting them.

In this article our debt recovery lawyers will discuss the basics of debt assignment in Queensland so that you, as a creditor, can better understand this process.

What is a Debt Assignment?

The first question that is to be asked about debt assignment is what it is and how it works?

A debt assignment is an agreement that transfers a debt , and all of the legal rights and responsibilities associated with it, from the creditor to a third-party purchaser.

This provides the third party with the right to collect the debt, while the creditor can no longer engage in the debt recovery process with the debt assigned.

Once an assignment of debt is verified, the rights will be transferred to the assignee and they will be the official owner of the debt, meaning that they can collect the debt for the money it is worth.

Chose in Action (Thing in Action)

The right to recover a debt is a “thing in action” or a “chose in action”.

A “chose in action” (often referred to as a “thing in action”) is a legal term that denotes a personal right without possession, or a proprietary right in personal property that is intangible and not in one’s possession, but enforceable through litigation.

Common examples of choses in action include debts, shares in a company, and other rights to receive something or have something done.

Contrast this with “chose in possession” which refers to something tangible that one can physically possess, like a book, a car, or money.

The phrase “chose in action” originates from old French and the term “chose” means “thing”.

In Queensland, the assignments of things in action are provided for in legislation, particularly at section 199 of the Property Law Act 1974  (Qld) (“ the PLA ”).

Section 199 of the Property Law Act

Section 199(1) of the PLA states:

(1) Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice— (a) the legal right to such debt or thing in action; and (b) all legal and other remedies for the same; and (c) the power to give a good discharge for the same without the concurrence of the assignor.

This part of the section means that a the right to recover a debt (being a thing in action) can be legally assigned. This assignment must be absolute and the debtor should receive a written notice, and obtaining the debtor’s consent for this assignment is not mandatory.

Section 199(2) of the PLA states:

(2) If the debtor, trustee or other person liable in respect of such debt or thing in action has notice— (a) that the assignment is disputed by the assignor or any person claiming under the assignor; or (b) of any other opposing or conflicting claims to such debt or thing in action; the debtor may, if the debtor thinks fit, either call upon the persons making claim to the debt or other thing in action to interplead concerning the same, or pay the debt or other thing in action into court under and in conformity with the provisions of the Act s relating to relief of trustees.

This part of the section says that if the debtor knows of disputes or conflicting claims regarding the assignment, they can either request claimants to clarify their stance or deposit the owed amount in court as per the Act’s guidelines.

These subsections raise some further questions, namely:

• What is an “ absolute debt assignment ” at law?
• What is a notice of debt assignment?

We will discuss these in further detail below.

What is an “Absolute Debt Assignment” at Law?

Absolute debt assignment refers to an unconditional transfer of property or rights, leaving no interest for the original owner.

Typically, it lets a creditor transfer their right to collect a debt to a third party. The debt assignment must be complete and without conditions for the benefit of both the debtor, who knows whom to pay, and the third party, who can legally claim the debt.

In Durham Brothers v Robertson [1898] 1 QB 765 , it was held that the document was not “an absolute assignment (not purporting to be by way of charge only)” and that the plaintiffs could not recover in the action. This was held because it was a charge. The Court said:

The document purports on the face of it to assign the debt, and it is not the less an absolute assignment because it contains, like any other mortgage, provisions that shew that it is only a security, and that there is a right to redeem. It is clear on the authorities that a mortgage with a power of redemption is an absolute assignment within the section.

In Clyne v Deputy Federal Commissioner of Taxation (1981) 150 CLR 1 , Mason J said at [24]:

An “absolute assignment” in the section signifies one which is unconditional.

In Austino Wentworthville Pty Limited v Metroland Australia Limited [2013] NSWCA 59 , Barrett JA said at [62], summarising the relevant principles emerging from the cases:

An “absolute” assignment is one that is unconditional and does not attempt to affect part only of the chose in action. The fact that an assignment otherwise absolute is accompanied by an express proviso for redemption, an implied right of redemption or the creation of a trust in respect of future proceeds does not deprive it of its absolute character. An assignment by way of charge is one the effect of which is to give a right of payment out of the subject matter assigned without outright transfer of that subject matter. Such an assignment occurs when, for example, there is a transfer of a right to be paid out of a particular fund or of so much of a debt as is sufficient to satisfy a future indebtedness. The character of the assignment must be ascertained from the terms and effect of the instrument, according to the construction of it as a whole.

So, to ascertain if the assignment is an absolute assignment, reference must be made to the contract (or deed of assignment), its terms and conditions, and read in the proper context.

Another requirement for an assigned debt to be valid is that the assignee must send a notice to the debtor.

What is a Notice of Debt Assignment?

Before the debt will be able to be collected by the new creditor, a notice of debt assignment must first be issued to the debtor. But what is this and what does it mean?

A notice of debt assignment is a formal notice that is issued to the debtor when a debt is assigned to a new creditor. The new creditor, or the assignee, must issue this notice to the debtor at their last recorded or known home address.

As a debtor, it is a sudden change to have a new creditor to whom they are making payments.

There may have to be a process of them switching details and making financial or legal arrangements to begin to make payments or to manage the debt in any other way of their choosing.

They should be provided the time to understand that they now have a new creditor, as this will likely be an unexpected change, and deal with their debt in the way that they choose, as they may have had previous arrangements or discussions with their initial creditor.

The purpose of the notice is to provide the debtor with this new information and to ensure that they begin making debt payments to the new creditor, rather than continuing to pay the previous creditor.

In Walter and Sullivan Ltd v J Murphy and Sons Ltd [1955] 1 All ER 853 , the court held that the following are the requirements of a valid notice of an assignment of a debt:

• The notice must be in writing.
• The notice must be signed by the assignor.
• The notice must identify the assignor and the assignee.
• The notice must identify the debt that is being assigned.

In Mango Boulevard Pty Ltd & Anor v Mio Art Pty Ltd & Ors [2016] QCA 148 , Fraser JA said at [34] citing the relevant authorities:

… to constitute valid notice, there must be some kind of formal notification by the assignee, or possibly by the assignor on his behalf, to the debtor in order to achieve the object described in the Walter & Sullivan case. This view is also consistent with the decision of the Court of Appeal in Talcott v John Lewis & Co Ltd [1940] 3 All ER 592, where it was held that a notice stamped by a creditor on his invoice stating that the invoice should be transferred and payment made to the assignee, was ineffective, both because it was insufficiently plain in its wording, and because it was not a notice sent by the assignee to the debtor.

Therefore, we would suggest that at a minimum, the written notice of debt assignment should include:

• A notice that it is an assignment of debt.
• The name and details of the assignor of the debt (old creditor).
• As many particulars of the original debt to enable the debtor to identify the debt to which the notice relates.
• All of the details of the assignee of the debt (new creditor).
• Direction to pay the debt to the assignee and the new payment details.
• Full particulars of the original debt amount, plus and costs and interest incurred.
• How the debtor can discharge the debt by payment.
• The assignment must be signed by the assignor.

It is important to note that the assignment does not need to be in any particular format.  However, it is advisable to have a lawyer draft the assignment to ensure that it is valid and enforceable.

After you have a valid assignment contract or deed of debt assignment signed; and you have a valid notice of assignment drafted, you must now give the notice of debt assignment to the debtor.

Proper Service of the Notice of Assignment of Debt

The notice must be valid, and it is the responsibility of the assignee to ensure that the notice is valid. The notice of assignment must be absolute and in writing, and the new creditor (or old creditor) must ensure that the notice is delivered properly to the debtor.

Section 347 of the Property Law Act 1974 (Qld) sets out the general rules for serving notices under the Act.  A notice may be served on a person:

• By delivering it personally to the person.
• By leaving it at the person’s usual place of abode or business.
• By posting it as a letter addressed to the person at their usual place of abode or business.

If the person is unknown or absent from the State, the notice may be served in such manner as directed by the court.

The Act also provides that a notice posted as a letter shall be deemed to have been served, unless the contrary is shown, at the time when by the ordinary course of post the notice would be delivered.

In Anning v Anning (1907) 4 CLR 1049 , Griffith CJ said of the then equivalent of s 199(1) that:

The section does not say by whom the notice is to be given, but it is, I think, clear that it may be given either by the assignor or the assignee.

In Grayprop Pty Ltd v Maharaj International Pty Ltd [2001] QSC 387 , it was held that the posting of a notice to a post office box did not comply with s.347 so as to attract the deeming provisions in that section relating to receipt of the notice. In that case Philippides J referred to David Sarikaya v Victorian Workcover Authority [1997] FCA 1372 , where Black CJ held:

… a post office box is not, in my view, the “address of a place” at which a document may be “left” for a person. The ordinary notion of “post office box” is of a container at a post office into which mail that has been duly posted is placed by postal authorities for retrieval by or on behalf of the holder of the box. Whether or not such a box is, in this context, the “address of a place”, it is not the address of a place at which a document may be “left” by way of service.

In Walter and Sullivan Ltd v J Murphy and Sons Ltd [1955] 1 All ER 853 , the court held that notice of an assignment of a debt must be given to a debtor in a way that is reasonably likely to bring it to their attention.

In the case, the assignor had given the debtor notice of the assignment by sending a letter to their registered office. However, the debtor had moved office and the letter was never received.

The court held that the notice was not valid because it had not been given in a way that was reasonably likely to bring it to the debtor’s attention.

Therefore, some takeaways re. service include:

• To give valid notice of an assignment of a debt, the notice must be given to the debtor in a way that is reasonably likely to bring it to their attention.
• This may involve sending the notice by registered post or delivering it in person.
• It is not enough to simply send the notice to the debtor’s registered office if the debtor has moved office and the notice is not received.

Enforcing an Assigned Debt

The debt has been assigned effectively and the notice has been delivered to the debtor. Now what?

The assignee is now entitled to collect the debt and to take any collection or legal action of their choosing.

As debts that are assigned are often somewhat problematic, as many sell problematic debts, legal action may be the choice that many take.

Commencing court proceedings and receiving and enforcing a judgement are some of the recovery options that assignees will have in the legal regard, such as enforcement warrants, bankruptcy , and issuing a statutory demand / winding up .

The recovery of an assigned debt can often raise several issues for assignees in the initial stages. There are several factors and occurrences that may cause these issues to arise, including:

• Misunderstanding of the debt assignment process by debtors, resulting in confusion or refusal to pay, as they do not understand that they are paying their debt or the same debt as before.
• As we have discussed, a debt assignment must be legal and valid. The debtor may raise a dispute regarding the validity of the assignment of debt, regardless of whether proper procedure was followed or not.
• You must be able to prove that the notice of assignment was effectively validly provided to the debtor. If you have failed to keep proper records of the formation and delivery of the notice, you may struggle to prove that it was both valid and provided.
• If the debtor had previously arranged any kind of understanding with the assignor, they may be able to take action against you for not fulfilling the arrangement, even if you were not notified about it before the sale. This, however, may constitute a breach of contract by the assignor, so you may be able to take action of your own if this turns out to be the case.

Benefits of Debt Assignment

There are several benefits for all parties involved in the assignment of debt, including;

For the Assignor:

The assignor, or the individual or party that is assigning the debt to a new creditor, benefits in several ways and circumstances by selling the debt.

For one, they will have an increased cash flow by being paid a larger piece of the debt in one payment, rather than smaller payments over an extended period, which can help them get their finances back on track or invest in their business.

They will also no longer have the risk of a debt, which may be unable to be collected due to insolvency or other reasons, mitigating risk from their business.

Furthermore, the time and resources spent dealing with the debt will no longer be required, freeing up their business resources for alternative use.

For the Assignee:

The assignee, or the new creditor of the debt, will also be privy to several benefits from the assignment of debt process.

As a debt purchaser , the chances are they will have access to resources or be experienced debt collectors who have the time and resources to focus on debt collection , increasing their chances of being paid.

They will also pay less than the debt is worth for the rights to collect it, leaving room for a large profit margin.

What to Consider in Debt Assignment

While there are many benefits that may be reaped from a debt assignment on either side of the matter, there are also some considerations that should be made.  They include;

The assignor of the debt should consider if this process is the right one for them and their business. After all, if the debt was collected regularly, they would collect more money over time, rather than being paid a larger amount of the debt immediately but not the full amount at any point in time.

The suitability of assigning a debt is something that can only be decided based on the specific circumstances of the matter and of the assignor’s business, so they should take the time to consider.

If the assignor wishes to maintain a relationship with this debtor for any reason, they should also consider notifying the debtor separately.

The assignee of the debt has several considerations to make, also regarding the suitability of this process for them. They will be taking on the responsibility of collecting a debt, which can take time and resources, so this must be feasible for them to commit to.

They are also accepting the risk of not being paid the debt at all or receiving only a small amount of it, so this must be a consideration made.

There is also a process that must be followed once the debt has been assigned, as discussed, so this should be considered as something that must be completed.

Limitation Dates for Assigned Debts

An assignee of debt must ensure that they are within the limitations of actions acts for each State and Territory to legally commence recovery of the debt.

The purpose of limitations of actions acts is to limit the delay for creditors to take action against a debtor for outstanding monies.

The limitation period for a contract debt is six (6) years in Queensland, calculated from the point of breach.

Where an assignee has been assigned a debt, the point of breach will commence from the date the debt was assigned to the assignee.

However, in some circumstances, where a debtor acknowledges the debt or makes a payment in respect of the debt, the point of breach starts from the date of acknowledgement or the last payment made by the debtor.

Common Mistakes to Avoid when Assigning Debt

There are a few things that you should avoid when assigning your debt. These include:

• Not having a written agreement : It is important to have a written agreement in place when assigning debt. This agreement should clearly identify the debt being assigned, the assignor, the assignee, and the terms of the assignment.
• Not notifying the debtor : The debtor must be notified of the assignment in writing. This notice should be given to the debtor before they make any payments to the assignor.
• Assigning debt that is not assignable : Not all debts can be assigned. For example, debts that are personal in nature, such as claims for defamation or assault, cannot be assigned.
• Failing to comply with the applicable laws and regulations : There are specific laws and regulations that govern the assignment of debt. It is important to comply with these laws and regulations to ensure that the assignment is valid.

Here are some additional tips to avoid common mistakes when assigning debt:

• Have a lawyer review the assignment agreement : A lawyer can help you to draft an assignment agreement that is valid and enforceable.
• Use a registered post to send the notice of assignment to the debtor : This will help to ensure that the debtor receives the notice and that there is a record of the notice being sent.
• Keep a copy of all documentation related to the assignment : This includes the assignment agreement, the notice of assignment, and any other relevant documents.

If you have any questions about assigning debt, you should consult with a lawyer asap.

FAQ on Debt Assignment in Queensland

Navigating the intricacies of debt assignment can be complex, given its multifaceted nature and the legal implications involved.

Whether you’re an assignor looking to transfer the rights to a debt or an assignee aiming to comprehend the dynamics of your new responsibility, it’s crucial to understand the entire spectrum of the process.

A debt assignment is a legal transfer of a creditor’s right to collect a debt to a third party, known as the assignee. Once assigned, the original creditor can no longer engage in the debt recovery process.

What is a “Chose in Action”?

A “chose in action” refers to a legal right without possession, like debts or shares in a company. It contrasts with “chose in possession,” which refers to tangible items like a car or book.

What does Section 199 of the Property Law Act 1974 (Qld) discuss?

It provides the legal framework for the assignment of things in action in Queensland, specifying that for a debt assignment to be valid, a written notice must be given to the debtor.

Do I need the debtor’s consent to assign the debt?

No, the debtor’s consent isn’t mandatory. However, they should receive a written notice of the debt assignment.

What is an “Absolute Debt Assignment” at law?

It refers to an unconditional transfer of rights, meaning the original owner retains no interest. This transfer allows the third party (assignee) to legally claim the debt.

What should a Notice of Debt Assignment include?

It should provide details about the original creditor, the assignee, specifics of the debt, payment instructions, legal implications, and the dates of assignment and notice.

Why is the notice important?

It’s a legal requirement for the assignment to be effective, ensures clear communication with the debtor, protects the assignee’s rights, and prevents potential disputes.

A Notice of Debt Assignment is a formal document sent to a debtor informing them that their debt has been transferred to a new creditor (assignee). This notice ensures the debtor makes payments to the new creditor rather than the original one.

Why is a notice of assignment of debt necessary?

It allows the debtor to understand and adapt to the unexpected change in the party to whom they owe money. It also gives them time to arrange their finances or change any existing agreements made with the original creditor.

What are the requirements for a valid Notice of Debt Assignment?

Based on legal precedents for a Notice of Debt Assignment to be valid it must be in writing; It should be signed by the original creditor (assignor); and it should identify both the assignor and the assignee; and the specific debt being assigned must be detailed.

What should be included in a well-drafted Notice of Debt Assignment?

A well-drafted Notice of Debt Assignment should include a statement clarifying it as an assignment of debt; details of the assignor (original creditor) and the assignee (new creditor); comprehensive information on the original debt, including any additional costs and interest; instructions on how to make payments to the new creditor; the method to finalise the debt payment; and the signature of the assignor.

How should the notice be served to the debtor?

For effective service, the notice should be personally delivered to the debtor; or left at their usual residence or place of business; or posted as a letter to their regular address. However, precautions should be taken regarding post office boxes as they might not comply with certain legal provisions.

What are the implications if the notice isn’t properly served?

A notice must be delivered in a manner that makes it likely to come to the debtor’s attention. Improper delivery can render the notice invalid. For instance, merely sending it to a moved office or a post office box might not suffice.

Does the format of the assignment need to be specific?

No, there isn’t a mandatory format. However, having a lawyer draft the notice ensures its validity and enforceability.

Who can issue the Notice of Debt Assignment?

Either the assignor or the assignee can issue the notice.

What does it mean when a debt is assigned?

When a debt is assigned, it means the original creditor (assignor) has transferred their rights to collect the debt to a new creditor (assignee). This transfer requires a formal notice to be given to the debtor.

After a debt has been assigned, who is responsible for collecting it?

The assignee, or the new creditor, is now responsible for collecting the debt. They can choose any legal collection method, which might include court proceedings.

What issues might arise after the assignment of a debt?

Issues can arise from misunderstandings by the debtor, challenges to the validity of the assignment, lack of proper documentation to prove the notice was provided, or previous agreements with the assignor that were not known by the assignee.

How does the assignor benefit from assigning a debt?

Assignors can benefit from an immediate influx of cash, reduction in the risk of non-collection, and a decrease in time and resources spent on collection efforts.

How does the assignee benefit from purchasing an assigned debt?

Assignees typically purchase debts at a reduced rate, giving them a chance for a higher profit margin upon collection. Additionally, experienced debt collectors might have the resources and expertise to effectively recover debts?

Are there any considerations to be made before assigning or accepting a debt?

Yes. Assignors should evaluate if debt assignment is suitable for their business situation and consider notifying the debtor separately. Assignees must weigh the commitment of resources against the potential risk of non-collection and ensure they understand and follow the necessary post-assignment processes.

Is there a time limit for the assignee to take action on a debt?

Yes. The limitation period for a contract debt is typically six years from the point of breach. However, this might vary if the debtor acknowledges the debt or makes a payment.

Are there common mistakes made during debt assignments?

Some common pitfalls include not having a written agreement, failing to notify the debtor, assigning non-assignable debts, and not adhering to relevant laws and regulations.

How can I ensure that the assignment process goes smoothly?

It’s advisable to consult with a lawyer, use registered post for notices, and keep thorough documentation of every step in the process.

Can all debts be assigned?

No. Some debts, especially those personal in nature like claims for defamation or assault, cannot be assigned. Always check the nature of the debt and legal stipulations before proceeding.

Wayne Davis

Disclaimer:  The content on this website is intended only to provide a general summary of information of interest. It is not intended to be comprehensive nor does it constitute legal advice. We attempt to ensure that the content is current but we do not guarantee its accuracy. You should seek legal or other professional advice before acting or relying on any of the content of this website. Your use of this website or the receipt of any information on this website is not intended to create nor does it create a solicitor-client relationship.

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Family Court Approves Assignment of Tax Debts Between Spouses

Does s90AE(1)-(2) of the Family Law Act 1975 (Cth) grant the court power to make Order 8 of the final orders sought in the amending initiating application of the wife?

The relevant Order sought by the wife was as follows:

Pursuant to section 90AE(1)(b) of the Family Law Act 1975 (Cth), in respect of the applicant wife’s indebtedness to the Commissioner of Taxation for the Commonwealth of Australia taxation related liabilities in the amount of $256,078.32 as at 9 August 2016 plus General Interest Charge (GIC) the respondent husband be substituted for the applicant wife as the debtor and the respondent husband be solely liable to the Commissioner of Taxation for the said debt.

The Court confirmed that it did indeed have that power.

Section 90AE of the Family Law Act 1975 (Cth) (the ‘Act”) provides (relevantly) as follows:

In proceedings under section 79 the Court may make any of the following orders:

• An order directed to a creditor of the parties to the marriage to substitute one party for both parties in relation to the debt owed to the creditor;
• An order directed to a creditor of one party to a marriage to substitute the other party, or both parties, to the marriage for that party in relation to the debt owed to the creditor.

The fact scenario in Tomaras & Tomaras and Anor and Commissioner of Taxation [2017] FamCAFC 216 is quite common with the agreed facts being as follows:-

• The parties were married for 17 years from 1992 until separation in 2009.
• During the relationship the applicant wife was assessed to pay income tax and the Medicare Levy but she failed to do so and failed to lodge any objection to the assessments.
• In November 2009 the Commissioner of Taxation obtained a default judgment against the applicant wife for the unpaid liabilities. The applicant wife did not pay the debt.
• In November 2013 the respondent husband became bankrupt.
• In December 2013 the applicant wife commenced proceedings for property adjustment orders.
• In February 2016 the Commissioner for Taxation was given leave to intervene in the proceedings.

The Commissioner contended that s90AE of the Act does not bind the Crown and accordingly the Court had no jurisdiction to substitute the husband for the wife in respect of her tax debt.  It relied upon the decision of the High Court in Bropho v State of Western Australia [1990] HCA 24 which established the position that the Australian Courts must apply a presumption that statutory provisions expressed in general terms do not bind the Crown.

When considering if s90AE should bind the Crown as the applicant sought, the Full Court was of the view that s90AE of the Family Law Act could only be of benefit to the Crown, rather than detrimental as the Crown perceived it to be.

The reasons for such a finding included:

• Instead of an impecunious taxpayer being responsible for the tax debt, a more wealthy spouse may be made solely responsible for the debt which would increase the prospects of recovery; and
• Instead of only one spouse being responsible, both spouses could be made liable, again increasing the prospects of recovery.

In matrimonial property settlement disputes, it is not uncommon that one spouse has a taxation liability in their name, arising from the distribution of income from a Family Trust throughout the relationship.

It is also not uncommon for that spouse to have no income from which to meet that liability and that they are reliant upon the more financial spouse to meet their tax debt.  Post separation the preparedness of the financial spouse to meet that debt more often than not, wains and the issue of responsibility for the tax liability becomes a matter of argument between lawyers.

The debt usually “lies where it lies” meaning that it will have to be met from property settlement entitlements, causing financial detriment to a party who may not be in employment and can ill afford to lose many thousands of dollars from their property entitlements.

The Court’s confirmation that s90AE of the Act specifically enables taxation debts to be assigned will open up a new method by which to deal with responsibility for matrimonial tax debts, irrespective of in whose name they are held.

If you have separated from your spouse and have concerns or questions regarding the appropriate treatment of taxation liabilities, or any other aspects of your property adjustment matter, our Family Law team are available to assist you with confident, cost effective and expert advice.

Get the right advice first time from Marino Law.

The taxation implications of 'debt forgiveness'

“Pardon” is a word that can sound somewhat archaic — which could be why the term “debt forgiveness” is barely mentioned in discussions on “bankruptcy”, even though the two concepts are related. Bankruptcy is dramatic, Hollywood; debt forgiveness seems dated, even mildly medieval.

In reality debt forgiveness, on the face of it, is a means by which commercial debts are wiped away, at least in part. In Australia debt forgiveness protocols are designed to help entities that cannot pay all of their loans restructure so they can repay as much as possible. Often, but not always, debt forgiveness is a precursor to or a result of bankruptcy.

Tax considerations go along with any forgiven debt. They don’tdisappear. Tax law has mechanisms to make sure people who have bad debts forgiven still honour their tax obligations to the revenue and can’t manipulate the system to get an unfair advantage. So an important take away point is that entities that have debts pardoned will generally see a commensurate decrease in their future tax breaks.

Debt forgiveness provisions exist to help curb hairy bookkeeping and arbitrage opportunities as a result of bad debts. Debt forgiveness would typically provide the creditor with a revenue loss (or in some cases, a capital loss). Meanwhile in the absence of debt forgiveness rules, the debtor may not have been assessed on any gain, and could continue to claim deductions for revenue and capital losses, as well as other deductible costs.

This kind of situation could constitute a doubling-up of tax breaks between the two taxpayers. So the commercial debt forgiveness provisions take aim at duplications by applying the forgiven amount with a view to reducing certain future deductions.

The legislation lists a few “circumstances” under which debts may be forgiven:

• the creditor’s obligation to pay the debt (or part of it) is released, waived, or otherwise extinguished other than by repayment in full,
• the debtor loses its right to sue for recovery of the debt because of the operation of a statute of limitations,
• the creditor enters into an arrangement with the debtor, where the obligation to pay the debt ends at a mutually agreed time and the creditor pays only a token amount, if anything,
• “debt parking” occurs (certain assignments to third parties), and
• a subscription for shares occurs to enable the debtor to discharge some or all of the debt with the subscription monies.

A commercial debt is defined as a debt in respect of which interest, (or amounts akin to interest), if it was paid or payable in respect of the debt, would be deductible.

The debtor’s “net forgiven amount” can be calculated using a simple equation. Gross forgiven amount of the debt, less:

• amounts included in assessable income as a result of the forgiveness,
• reductions in allowable deductions as a result of the forgiveness,
• reductions in cost bases of CGT assets as a result of the forgiveness,

= net forgiven amount of the debt.

Where the debtor and creditor are companies under common ownership, the debtor’s net forgiven amount can be reduced to the extent that the creditor agrees to forego their revenue deduction or capital loss arising from the debt forgiveness.

The total net forgiven amount is then applied successively to:

• carry forward tax losses and capital losses;
• tax written down values of depreciating assets, and balances of the amounts deductible over time;
• reduce cost bases of CGT assets.

Once all of these amounts are reduced to nil, any remaining net forgiven amount simply disappears forever.

As with CGT, market value rules may apply to determine consideration in respect of the forgiveness of a “non-money” debt. Specific rules also apply to determine consideration for the purposes of the debt forgiveness provisions where debt parking applies or where there is a debt for equity swap.

Debt forgiveness provisions do not apply to debts forgiven:

• if the debt waiver constitutes a fringe benefit.
• if the amount of the debt has been, or will be, included in the assessable income of the debtor.
• under an act relating to bankruptcy.
• where forgiveness is affected by will.
• for reasons of natural love and affection.

There are other exclusions to be mindful of as well, such as where the forgiven debt can be seen to be in respect of employment. In these cases, the benefit of being forgiven a debt will typically constitute a fringe benefit, and be taxed as such. Exclusions may also apply if the forgiven amount sees it included in the assessable income of the debtor. This can happen (as detailed above) where a private company is deemed to have paid a dividend (under Division 7A) where a debt owed to the company is forgiven.

There are even situations where the forgiven debt gives rise to ordinary income. For example this can occur when a taxpayer’s resulting gain from a released debt deemed to have arisen from the ordinary activities of the taxpayer, or it otherwise displays generally accepted characteristics of ordinary income (such as if such gains are periodic, recurrent and/or expected).

A few years ago taxpayers saw an unprecedented result out of the global financial crisis — a huge increase in the number of loans written off or compromised. Forgiveness in those circumstances may not be so prevalent now, but it’s important taxpayers remain conscious of the broad definitions of “forgiveness” listed in tax law. Making sure the consequences of a forgiveness is understood before it takes place — in no small part by consulting the myriad of laws on the subject — is vital, and don’t forget that the creditor will also have vested interests in the details of the arrangement as they will bear tax consequences too. 

Division 7A

Division 7A is one of many sizeable banners that come within the ambit of the debt forgiveness rules. This is because a forgiven debt could be deemed to be a dividend paid to a shareholder (and therefore taxable), unless certain conditions are met. It applies to debts forgiven on or after 4 December, being the date Division 7A took effect.

Debt restructuring: International tax considerations

International.

United Kingdom |  Publication |  August 2020

Introduction

1. sale of distressed debt, 2. debt-to-equity swaps, 3. debt waivers or modifications, concluding remarks.

The increasingly unpredictable economic landscape has created uncertainty and distress for businesses across a broad range of sectors and markets. Borrowers have been working to stabilize their businesses and ensure they have the liquidity to continue to trade through these difficult times. Lenders have been working to assist and support their borrowers by providing amendments and waivers under existing facilities as well as new money (where the circumstances permit).

But what happens if things don’t go to plan?

We know from past experience that borrowers and lenders have a number of debt restructuring scenarios that they commonly consider: from partial waivers to debt-to-equity swaps; from conditional waivers to the sale of distressed debt. But especially in a cross-border context, specific local tax consequences can significantly impact the choice between one scenario and another.

Norton Rose Fulbright has performed research across selected jurisdictions (i.e. the US, Australia, Canada, South Africa, France, the UK, Germany, Luxembourg and the Netherlands) on various debt restructuring scenarios and the local tax impact on debtors and creditors. This research has provided us with insight into various pitfalls that might occur from international debt restructurings.

This note discusses three commonly used debt restructuring scenarios:

• Sale of distressed debt
• Debt-to-equity swaps
• Debt waivers.

The goal is to flag key tax items across selected jurisdictions for each scenario, because we know from experience that, although certain international trends can be seen, any international debt restructuring requires careful consideration of the relevant local tax regimes.

The sale of distressed debt is a mechanism for a creditor to reduce their balance sheet exposure to debts which may currently be non-performing or have a significant risk of future default. In such circumstances, the debt would be sold at a discount to face value in view of the distressed financial circumstances of the debtor.

Certain private equity and other investment funds are known to have an appetite for the purchase of distressed debt on secondary markets (which may come in the form of an individual loan or a large portfolio) at a reduced price in order to realize a profit by either:

• In the case of a liquid market, rapidly selling on the debt
• Negotiating a financial restructuring of the company and/or awaiting the financial recovery of the debtor and consequently the future repayment of the debt.

As well as sales to unconnected parties, it may also be that the parties want to arrange a disposal to a connected party. This may occur, for example, where a debtor wants to acquire a debt into a group to remove the controls placed on it by the third-party creditor.

The sale of distressed debt is achieved by way of assignment or novation, depending on the terms of the debt. Consent of the debtor to a sale may be required. Individual debt sales are usually carried out on standardized documents, whereas portfolio sales are more likely to be negotiated on a bespoke basis. Alternatively, the creditor may sub-participate its interest in the loan, in which case it remains the lender of record but transfers the credit risk of the debtor to the participant. This may not result in the distressed loan coming off its balance sheet.

Key tax considerations

The selling creditor will want to ensure that they are able to claim relief for any loss they have incurred with respect to the debt. A buyer will want to ensure that their base cost in the loan is the price paid; that they do not suffer any immediate tax charge and that there are no transfer taxes that arise as a result.

The debtor will want to ensure that there are no adverse tax charges arising for them in relation to the sale and that the sale does not adversely impact on the deductibility of interest payments going forward. It will also be important for the parties to consider the impact on the withholding tax treatment of interest payments and the allocation of risk under the loan documents. A change in lender may mean that interest can no longer be paid gross or new treaty applications are required.

Both parties will want to ensure there is no tax charge for the creditor.

Research findings

Below we will summarize our key findings for the sale of distressed debt, where we distinguish between general international tax trends (i.e. how do the majority of the jurisdictions treat the sale of distressed debt) and specific tax issues (i.e. which jurisdictions take a different approach than others and therefore may need further consideration if a local tax payer is involved in the sale of distressed debt):

General trends

• The selling creditor’s position upon a sale is largely consistent across the jurisdictions, with a creditor realizing a tax deductible loss upon the sale of the debt at a discount. This loss typically reflects the difference between the carrying value of the loan and the sale proceeds, assuming that the sale is on arm’s length terms. There may be no tax loss where the selling creditor and buying creditor are connected.
• The transfer of a creditor’s right to a debt to another entity does not generally affect the corporate income tax position of the debtor (whose obligation to repay is generally unaffected by the sale). Some jurisdictions impose a tax charge on the debtor where the buying creditor is connected with the debtor.
• The buying creditor will generally not suffer an immediate tax charge and its base cost in the debt will be the price it paid (again assuming that the acquisition is on arm’s length terms).
• The transfer of a debt should not give rise to transfer taxes unless the debt has equity like characteristics such as results-dependent interest or is convertible into equity.

Specific issues

In circumstances where the buying creditor and debtor are related parties, the debtor may be subject to tax on the difference between the carrying value of the debt and the amount the incoming creditor paid for the acquisition.

The general rule which states that the debtor’s tax obligations will be unaffected on the sale of a debt will apply provided that the debtor is notified of the change in creditor.

If the sale is set up on beneficial terms for the incoming creditor, a taxable gain may be charged on any hidden capital contribution or distribution which that creditor receives.

• The Netherlands

Stringent anti-avoidance provisions are in place to ensure that a creditor cannot avoid Dutch tax liability from an upward valuation of a loan which has previously been written-down (where the parties are affiliates).

If a debt is sold to an incoming creditor that meets certain interest tests in the debtor for less than 80 percent of the principal amount of the loan, then a taxable credit may arise in the debtor.

A debt-to-equity swap, substitution or restructuring is a capital reorganization of a company in which a creditor (usually a bank, possibly together with other banks, bondholders or creditors) converts indebtedness owed to it by a company into one or more classes of that company’s share capital.

There is no preordained structure for a debt-to-equity swap. Much depends on the existing debt and capital profile of the company and the intended result. The main commercial issues to be settled between the company (effectively representing its shareholders) and its principal bank (and other creditors) are:

• How much debt is to be substituted by share capital?
• What proportion of the total equity should the shares issued to the creditor comprise?
• Which class of shares should be issued to the creditor? Are there any restrictions on the type of shares issued?
• Should the creditor accept any restriction on its ability to dispose of the shares issued to it?

To a large degree, the negotiating position of the bank will depend on whether or not the reconstruction involves new money from other investors being injected by way of share capital. Institutional investors considering putting new money into the company will usually drive a harder bargain than the company itself.

The creditor will be interested in:

• Tax relief for the debt that is capitalized.
• The tax base cost in the new shares issued on the debt capitalization.
• Tax charges on the issuing company on the debt capitalization.

From a debtor perspective, the key aspects are:

• Will release of the debt result in taxable income?
• Will the issuance of new shares cause a cancellation of losses?

Below we will summarize our key findings for debt-to-equity swaps, where we distinguish between general international tax trends (i.e. how do the majority of the jurisdictions treat a debt-to-equity swap) and specific tax issues (i.e. what jurisdictions take a different approach than others and therefore may need further consideration if a local tax payer is involved in a debt-to-equity swap):

• Creditors involved in a debt-to-equity swap are generally able to convert their debt into equity in a tax neutral transaction, where the tax book value of the shares received equals the tax book value of the converted debt.
• The position may be different if the creditor is a related party of the debtor. A number of jurisdictions have legislation that prevents a creditor from depreciating a debt and subsequently converting the debt into equity in a tax neutral way.
• A debtor that issues new shares to the creditor as part of the debt-to-equity swap may suffer a reduction of its tax losses. If the release of the debt is considered to give rise to taxable income, this may impact existing tax losses. Certain countries apply specific debt forgiveness rules that prevent taxation at the debtor level in case the release of the debt exceeds available tax losses.
• In addition, the issue of new shares to a creditor outside the debtor’s group may result in a (substantial) change of shareholder and thus trigger tax loss cancellation rules in a number of jurisdictions, or a change of ownership for tax purposes.

When a German debtor is relieved from its debt (including as a result of a debt-to-equity swap), the cancellation of the debt will trigger a taxable gain to the extent the debt was depreciated by the creditor. This is the reason that straight-forward debt-to-equity swaps are very rare in Germany.

The UK has prescriptive rules which govern the circumstances in which debt-to-equity swaps will give rise to relief for the creditor and avoid a taxable credit for the debtor. For example, the release must be in consideration for ordinary share capital which rules out use of fixed rate preference shares. Care must be taken to ensure that the relevant conditions are met.

A debt-to-equity swap is generally a tax neutral event for debtors, where both the release of the debt and issuance of shares are accounted for at nominal value rather than market value.

A debt waiver, debt cancellation or debt forgiveness is a transaction in which a creditor (usually a shareholder but also third-party creditors such as banks, bondholders or suppliers) voluntarily relinquishes its right (in whole or in part) to payment under a debt instrument. The waiver serves the purpose of relieving the debtor from a financial obligation; it is a common element in restructuring scenarios, including UK Schemes of Arrangement and US “Chapter 11” procedures (and is expected to form a part of WHOA schemes). The debt waiver is often part of a package of relief used in an effort to ensure the survival and prospects of the debtor.

There is no set structure for a debt waiver. In principle, it may be implemented by a simple and short waiver declaration.

Debt modification

As an alternative to a waiver, the terms of the debt may be amended so any repayment is contingent on certain conditions being satisfied. However, agreeing the conditions for payment may be a complex task as the agreement needs to anticipate under which circumstances the company is required to pay the debt.

As a part of restructuring negotiations, creditors may require some form of reward if the restructuring proves successful. These benefits can take a number of forms, including increased pricing, a cash sweep, exit fees and/or equity-like debt instruments. For this purpose, the debt can be (partially) waived, amended and/or swapped for a new instrument at the time of the restructuring. Payment of the debt could be conditional on the financial situation of the debtor improving such that its debt capacity allows for a (partial) servicing of the debt.

Waiver and conditional reinstatement

In Germany, creditors can agree to a waiver of debt on the basis that such debt will be reinstated if certain conditions are satisfied, e.g. if and to the extent the debtor recovers financially.

Similar to the modification of debt, the agreement on the terms of the reinstatement of the debt can be rather complex. From a tax and accounting perspective, such transaction is treated as a full waiver and the creation of new debt once the reinstatement takes place. Other jurisdictions outside Germany do not treat a waiver with a conditional reinstatement as a waiver of debt, but rather as an amendment to the payment terms of the instrument.

Main commercial issues

The main commercial issues to be settled between the company and its creditors are:

• How much of the debt is to be forgiven? Will all creditors participate in the measure equally (the expectation being that creditors in the same class would be treated equally)? Should shareholder financing take the hardest hit (the expectation being that shareholder debt is treated akin to equity and so should be released before third-party lenders are expected to release their debt)?
• Should the waiver be in combination with other measures (e.g. debt-to-equity conversion)? Should the measures be linked (e.g. possibility to convert into equity upon certain triggers)?
• Under which circumstances will the debt be payable? Can certain creditors – secured vs. unsecured or long-term vs. short-term – take priority?

To a large degree, the negotiating position will depend on the granularity of the creditor group. The more the company needs to rely on the buy-in of only a few creditors, the more bargaining power they will have when it comes to the terms of the reinstatement.

• Will the release of the debt result in a tax relief and will the payment of the debt result in taxable income?
• In case of any changes to the terms of the debt, is it free to structure the conditions for payment? In how far can it mitigate abuse by the debtor?
• Will the release of the debt result in taxable income?
• In case of amendments, will the payment of the debt result in a tax relief?
• Is a new debt created?

Below we will summarize our key findings for debt waivers and modifications, where we distinguish between general international tax trends (i.e. how do the majority of the jurisdictions treat a waiver and reinstatement of debt) and specific tax issues (i.e. what jurisdictions take a different approach than others and therefore may need further consideration if a local tax payer is involved in a debt waiver or modification):

• Creditors involved in a debt waiver transaction are generally able to obtain a tax relief for the debt forgiven. This treatment is mirrored at the time the condition is fulfilled and the debt is reinstated: the debtor realizes a taxable gain.
• For the debtor, the waiver is generally taxed since it is released of a repayment obligation at nominal value.
• In Germany, a waiver with a conditional reinstatement typically results in a tax relief for the debt recognized at the time of reinstatement. Of course, in other jurisdictions where the waiver is not recognized as such, neither the waiver/ modification of payment terms nor the reinstatement would be taxed.
• If the loan is cross-border, a new loan may be created, so that new double tax treaty clearances are required.

The waiver of shareholder debt may be treated as a (hidden) contribution in kind, if and to the extent the debt is valuable. The conditional debt waiver is also used as a loss-refresher to carry a loss beyond a change-of-control which would typically cause a forfeiture of tax losses.

A conditional debt waiver is accepted as a waiver and potential reinstatement if, at the time of the waiver, it is unlikely that the debtor becomes solvent again. Given that many restructuring/ insolvency regimes work on the assumption of a successful turnaround, the conditional waiver may often not be recognized.

Where a loan is amended so that repayment is made to be contingent or conditional then care will need to be had that this does not cause the loan to be treated as equity.

The current economic environment may create the need for multinationals to reconsider their debt positions. At the same time, distressed debt and other investment funds (such as private equity investors) are actively looking for investment opportunities. But especially in a cross-border context, each debt restructuring scenario is impacted by specific local tax consequences.

In this note we have summarized some general trends and specific tax issues that could arise from a sale and purchase of a distressed debt, debt-to-equity swaps and debt waivers. One of the key take-aways from our international research is that although certain international trends can be seen, any international debt restructuring requires careful consideration of the applicable local tax regimes.

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• GAINS & LOSSES

Taxing the Transfer of Debts Between Debtors and Creditors

• C Corporation Income Taxation
• NOL & Other Tax Attributes
• Individual Income Taxation

T he frequent transfer of cash between closely held businesses and their owners is very common. If the owner works in the business, the transfer is likely to be either a salary to a shareholder/employee or a Sec. 707(c) guaranteed payment to a partner. Alternatively, the transfer may be a loan. As long as the true substance of the transaction is a loan, it will be respected for tax purposes. 1

The cash flow is not exclusively from the businesses to the owner. Many owners prefer to capitalize their closely held business with a combination of equity and debt. Once again, these loans will be respected and not reclassified as equity if they are bona fide loans.

In the normal course of business, these loans are repaid. The receipt of the repayment will be tax free except to the extent it is interest. However, in difficult economic conditions, many of these loans are not repaid. To the extent that the creditor cancels the obligation, the debtor has cancellation of debt (COD) income under Sec. 61(a)(12). This income is taxable unless the taxpayer qualifies for an exclusion under Sec. 108. In other cases, the debt is transferred between the parties either as an independent transaction or part of a larger one. This article reviews these transactions.

Two basic types of transfers have created significant tax issues. In the first, the debtor transfers the debt to the creditor. If the debtor is the owner of a business and the business is a creditor, the transfer appears to be a contribution. If the business is the debtor and the owner is the creditor, the transfer can be a distribution, liquidation, or reorganization. The other type of transfer is from the creditor to the debtor. Again, the transaction can take the form of a contribution if the creditor is the owner, or it can take the form of a distribution, liquidation, or reorganization if the creditor is the business.

Debtor-to-Creditor Transfers

Corporations.

The two seminal cases that established the framework for analyzing the transfer of a debt obligation from a debtor to a creditor are Kniffen 2 and Edwards Motor Transit Co. 3 Arthur Kniffen ran a sole proprietorship and owned a corporation. The sole proprietorship borrowed money from the corporation. For valid business reasons, Kniffen transferred the assets and liabili ties of the proprietorship to the corporation in exchange for stock of the corporation, thereby transferring a debt from the debtor to the creditor. The transaction met the requirements of Sec. 351.

The government argued that the transfer of the debt to the creditor was in fact a discharge or cancellation of the debt (a single step), which should have been treated as the receipt of boot under Sec. 351(b) and taxed currently. The taxpayer argued that the transfer was an assumption of the debt and, based on Sec. 357(a), should not be treated as boot.

The Tax Court acknowledged that the debt was canceled by operation of law. However, it did not accept the government’s argument as to the structure of the transaction. Instead, it determined that two separate steps occurred. First, the corporation assumed the debt. This assumption was covered by Sec. 357(a). After the assumption, the interests of the debtor and creditor merged and the debt was extinguished. Since the transfer was not for tax avoidance purposes, Sec. 357(b) did not apply. The result was a tax-free Sec. 351 transaction, except to the extent that the assumed debt exceeded the bases of the assets transferred, resulting in gain under Sec. 357(c). This decision established the separation of the debt transfer from its extinguishment.

Edwards Motor Transit Co. cites, and is considered to have adopted, the approach in Kniffen . For valid business reasons, the owners of Edwards created The Susquehanna Co., a holding company, and transferred Edwards’ stock to it under Sec. 351. Susquehanna borrowed money from Edwards to meet certain financial obligations. To eliminate problems that arose from having a holding company owning the stock of an operating company, the owners merged Susquehanna into Edwards under Sec. 368(a)(1)(A). The government acknowledged that the basic transaction was a nontaxable merger. However, the government wanted the company to recognize income as a result of the cancellation or forgiveness of the debt. The Tax Court ruled for the taxpayer, on the grounds that the debt transfer (from debtor to creditor) was not a cancellation of the debt. The ruling cited Kniffen as authority for this conclusion.

On its surface, Edwards Motor Transit affirmed the decision and reasoning in Kniffen . The Tax Court stated, “The transfer by the parent corporation of its assets to Edwards [its subsidiary] . . . constituted payment of the outstanding liabilities . . . just as surely as if Susquehanna had made payment in cash.” This statement relied on both Kniffen and Estate of Gilmore. 4 In Gilmore , a liquidating corporation transferred a receivable to its shareholder who happened to be the debtor. In that case, the court ruled the transaction was an asset transfer and not a forgiveness of debt. The court based its conclusion in large part on the fact that no actual cancellation of the debt occurred.

The statement in Edwards Motor Transit quoted above, however, is inapposite to the conclusion in Kniffen . A payment is not a transfer and assumption of a liability. Since Susquehanna was deemed to have used assets to repay the debt, the Tax Court should have required Susquehanna to recognize gain to the extent that the value of the assets used to repay the debt exceeded their bases. The conclusions in Kniffen and Edwards are consistent only in their holdings that these debt transfers were not cancellations of debts that would result in COD income. In Kniffen, the court ruled that the debt was assumed and then extinguished. In Edwards, the court ruled that the extinguishment of the debt constituted repayment.

It is possible that the Tax Court reached the correct outcome in Edwards Motor Transit but for the wrong reason. In Rev. Rul 72-464, 5 a debtor corporation merged into the creditor corporation in a tax-free A reorganization under Sec. 368(a)(1)(A). The ruling concluded that the debtor corporation did not recognize any gain or loss on the extinguishment of the debt within the acquiring corporation. General Counsel Memorandum (GCM) 34902 6 provided the detailed analysis behind the conclusion.

The GCM cited both Kniffen and Edwards 7 and adopted their underlying rationale. Specifically, it concluded that the basic transaction (the reorganization) results in a transfer of the debt to the acquiring corporation. It is after the transfer that the debt is extinguished by the statutory merger of interests. The transfer is an assumption of debt, which is nontaxable under Sec. 357(a). Therefore, the transferor (debtor corporation) recognizes no gain or loss.

This is exactly what happened in Ed wards . The debt was assumed, not repaid. Therefore, the Tax Court should have reached the conclusion that the transaction was nontaxable under Sec. 357(a) and not have relied on the questionable authority of Estate of Gilmore 8 or concluded that the debt was repaid.

Liquidations

The transactions discussed up to this point have been either tax-free corporate formations (Sec. 351) or tax-free reorganizations (Sec. 361). In a different transaction that is likely to occur, the creditor/shareholder liquidates the debtor corporation.

If the transaction is not between a parent and its subsidiary, taxability is determined by Secs. 331 and 336. Prior to 1986, the outcome might have been determined by Kniffen and Edwards . With the repeal that year of the General Utilities 9 doctrine (tax-free corporate property distributions) and the enactment of current Sec. 336, the outcome is straightforward. Under Sec. 336, the debtor corporation that is liquidated recognizes its gains and losses. Whether the liquidated corporation is treated as using assets to satisfy a debt requiring the recognition of gain or is treated as distributing assets in a taxable transaction under Sec. 336, all the gains and losses are recognized.

The taxation of the shareholder is a little more complex. First, the shareholder must determine how much it received in exchange for the stock. The most reasonable answer is that the shareholder received the value of the assets minus any debt assumed and minus the face amount of the debt owed to it by the liquidated corporation. This amount is used to determine the gain or loss that results from the hypothetical sale of stock under Sec. 331. Second, the shareholder must determine what was received for the debt, whether assets or the debt itself. The amount received in payment of the liquidated corporation’s debt is a nontaxable return of capital. If the shareholder is deemed to have received the debt itself, then the debt is merged out of existence. The basis of all the assets received should be their fair market value (FMV) under either Sec. 334(a) or general basis rules.

If the liquidated corporation is a subsidiary of the creditor/shareholder, the results change. Under Sec. 337, a subsidiary recognizes neither gain nor loss on the transfer of its assets in liquidation to an 80% distributee (parent). Sec. 337(b) expands this rule to include distributions in payment of debts owed to the parent corporation. Therefore, the subsidiary/debtor does not recognize any gain or loss.

The parent corporation (creditor) recognizes no gain or loss on the liquidation of its subsidiary under Sec. 332. The basis of the transferred property in the hands of the parent is carryover basis. 10 This carry­over basis rule also applies to property received as payment of debt if the subsidiary does not recognize gain or loss on the repayment. 11 In other words, the gain or loss is postponed until the assets are disposed of by the parent corporation.

One important exception to the nonrecognition rule is applied to the parent corporation. Under Regs. Sec. 1.332-7, if the parent’s basis in the debt is different from the face amount of the debt, the parent recognizes the realized gain or loss (face amount minus basis) that results from the repayment. Since this regulation does not mention any exception to the rules of Sec. 334(b)(1), the parent corporation is required to use carryover basis for all the assets received without adjustment for any gain or loss recognized on the debt.

This discussion of liquidations assumes that the liquidated corporation is solvent. If it is insolvent, the answer changes. The transaction cannot qualify under Secs. 332 and 337. The shareholder is not treated as receiving any property in exchange for stock; therefore, a loss is allowed under Sec. 165(g). The taxation of the debt depends on the amount, if any, received by the shareholder as a result of the debt.

Partnerships

The taxation of debt transfers involving partnerships is determined, in large part, by Secs. 731, 752, and 707(a)(2)(B). Specifically, the taxation of transfers by debtor partners to the creditor/partnership is determined by the disguised sale rules of Sec. 707(a)(2)(B), whereas transfers by debtor partnerships to a creditor/partner fall under Secs. 731 and 752.

Sec. 707(a)(2)(B) provides that a transfer of property by a partner to a partnership and a related transfer of cash or property to the partner is treated as a sale of property. The regulations specify the extent to which the partnership’s assumption of liabilities from the partner is treated as the distribution of the sale price.

Regs. Sec. 1.707-5 divides assumed liabilities into either qualified liabilities or unqualified liabilities. A qualified liability 12 is one that:

• Was incurred more than two years before the assumption;
• Was incurred within two years of the assumption, but was not incurred in anticipation of the assumption;
• Was allocated to a capital expenditure related to the property transferred to the partnership under Temp. Regs. Sec. 1.163-8T; or
• Was incurred in the ordinary course of business in which it was used, but only if all the material assets of that trade or business are transferred to the partnership.

The amount of qualified recourse liabilities is limited to the FMV of the transferred property reduced by senior liabilities. Any additional recourse liabilities are treated as nonqualified debt.

If a transfer of property is not otherwise treated as part of a sale, the partnership’s assumption of a qualified liability in connection with a transfer of property is not treated as part of a sale. The assumption of nonqualified liabilities is treated as sale proceeds to the extent that the assumed liability exceeds the transferring partner’s share of that liability (as determined under Sec. 752) immediately after the partnership assumes the liability. If no money or other consideration is transferred to the partner by the partnership in the transaction, the assumption of qualified liabilities in a transaction treated as a sale is also treated as sales proceeds to the extent of the transferring partner’s share of that liability immediately after the partnership assumes the liability. 13 Following the assumption of the liability, the interests of the debtor and creditor merge, thereby extinguishing the debt. The result is that generally the full amount of these assumed liabilities are part of the sale proceeds. 14

The assumed liabilities that are not treated as sale proceeds still fall under Sec. 752. Since the transaction results in a reduction of the transferor’s personal liabilities, the taxpayer is deemed to have received a cash distribution equal to the amount of the debt assumed under Sec. 752(b). Given that the debt is immediately extinguished, no amount is allocated to any partner. The end result is that the transferor must recognize gain if the liability transferred exceeds the transferor’s outside basis before the transaction, increased by the basis of any asset transferred to the partnership as part of the transaction.

A partnership may have borrowed money from a partner and then engaged in a transaction that transfers the debt to the creditor/partner. The first question is whether the initial transaction is a loan or capital contribution. Sec. 707(a) permits loans by partners to partnerships. The evaluation of the transaction is similar to one to determine whether a shareholder has loaned money to a corporation or made a capital contribution. The factors laid out in Sec. 385 and Notice 94-47 15 should be considered in this analysis.

Assuming the debt is real and it alone is transferred to the creditor/partner, the outcome is straightforward. The partner is treated as having made a cash contribution to the partnership under Sec. 752(a) to the extent that the amount of debt exceeds the amount allocated to the partner under the Sec. 752 regulations. If part of the debt is allocated to other partners, these other partners are treated as receiving a deemed cash distribution.

If the transfer is part of a larger transaction, then the analysis is a little more complex. The transfer of the other assets is governed by Secs. 737, 731, and 751. Sec. 737 requires a partner to recognize gain if, during the prior seven years, the partner had contributed property with built-in gain to the partnership and the current FMV of the distributed property exceeds the partner’s outside basis. The partner is treated as recognizing gain in an amount equal to the lesser of (1) the excess (if any) of the FMV of property (other than money) received in the distribution over the adjusted basis of such partner’s interest in the partnership immediately before the distribution reduced (but not below zero) by the amount of money received in the distribution, or (2) the net precontribution gain of the partner. The outside basis is increased by the amount of the deemed contribution because the partner assumed a partnership liability. After any gain under Sec. 737 is determined, the general distribution rules of Secs. 731 and 751(b) apply to the transaction. In effect, the transfer to a creditor/partner of a partnership debt owed to the partner is treated the same as any liability assumed by the partner. The extinguishment of the debt should not result in additional tax consequences.

Creditor-to-Debtor Transfers

In addition to debtor-to-creditor transfers, there are creditor-to-debtor transfers. The outcome of these transactions is determined by the two-step analysis in Kniffen . The creditor is treated as having transferred an asset to the debtor/owner. After the transfer, the interests of the debtor and creditor merge, resulting in the extinguishment of the debt. This extinguishment is generally nontaxable since the basis of the debt and the face amount are equal. 16 The result changes if the basis in the hands of the creditor and the adjusted issue price of the debtor are not equal. 17

One of the initial pieces of guidance that addressed this question was Rev. Rul. 72-464. 18 In this ruling, the debt was transferred in a nontaxable transaction. Consequently, the recipient (the debtor) had a carryover basis in the debt. Since this basis was less than the face amount, gain equal to the difference was recognized. This ruling did not explain the reasoning behind the gain recognition or the potential impact if the value of the debt was different from its basis. 19 These items were addressed in Rev. Rul. 93-7. 20

Rev. Rul. 93-7 analyzed a transaction between a partnership and a partner, here designated P and A , respectively. A was a 50% partner. This percentage allowed A to not be a related party to P under Sec. 707(b). P also had no Sec. 751 assets, and A had no share of P ’s liabilities under Sec. 752. These were excluded because they did not affect the reasoning behind the taxation of debt transfers. A issued a debt with a face amount of $100 for $100. P acquired the debt for $100. When the debt was worth $90, it was distributed to A in complete redemption of its interest, which had an FMV of $90 and outside basis of $25. In other words, a creditor/partnership distributed debt to the debtor/partner.

The debt was an asset, a receivable, in the hands of P . When it was distributed to A , P determined its taxation under Sec. 731(b), which provides that no gain or loss is recognized by a partnership on the distribution of property. The application of Sec. 731(b) in this transaction followed directly from Kniffen , which treated the transfer of a debt as a separate transaction from any extinguishment that follows the transfer. Under Sec. 732, A ’s basis in the transferred debt was $25. 21

The basis rules of Sec. 732 assume that a built-in gain or loss on distributed property is realized and recognized when the recipient disposes of the property. In this situation, the distributed debt was extinguished, and therefore no future event would generate taxable gain or loss. Consequently, this extinguishment became a taxable event. In this specific case, A recognized gain of $65 ($90 FMV – $25 basis) and COD income of $10 ($100 face − $90 FMV.) The ruling did not spell out the reasoning for the recognition of both gain and COD income. It is the correct outcome based on Regs. Sec. 1.1001-2. Under that regulation, when property is used to satisfy a recourse obligation, the debtor has gain equal to the difference between the value of the property and its basis, and COD income equal to the difference between the amount of debt and the value of the property used as settlement. The distributed debt is property at the time of the distribution, and the rules of Regs. Sec. 1.1001-2 should apply.

In Rev. Rul. 93-7, the value of the debt was less than the face amount. A debt’s value could exceed its face amount. In that case, the revenue ruling indicated, a deduction for the excess value may be available to the partner as a result of the deemed merger. In Letter Ruling 201105016, 22 the IRS ruled that a taxpayer was entitled to a deduction when it reacquired its debt at a premium as part of a restructuring plan. Rev. Rul. 93-7 cited Regs. Sec. 1.163-4(c)(1), and Letter Ruling 201105016 cited Regs. Sec. 1.163-7(c). Both regulations state that the reacquisition of debt at a premium results in deductible interest expense equal to the repurchase amount minus the adjusted issue price. Regs. Sec. 1.163-4(c)(1) applies to corporate taxpayers, while Regs. Sec. 1.163-7(c) expanded this treatment to all taxpayers. Based on these regulations and the treatment of the distribution as an acquisition of a debt, an interest expense deduction should be permitted when the value exceeds the amount of debt, whereas COD income is recognized when the value is less than the amount of the debt.

In Rev. Rul. 93-7, the partnership was the creditor, and the debt was transferred to a debtor/partner. The reverse transaction can occur, in which a creditor/partner transfers debt to the debtor/partnership in exchange for a capital or profits interest. Sec. 721 applies to the creditor/partner. Therefore, no gain or loss is recognized. However, Sec. 108(e)(8)(B) applies to the debtor/partnership. Sec. 108(e)(8)(B) provides that the partnership recognizes COD income equal to the excess of the debt canceled over the value of the interest received by the creditor. This income is allocated to the partners that owned interests immediately before the transfer. The partnership does not recognize gain or loss (other than the COD income) as a result of this transaction. 23 The value of the interest generally is determined by the liquidation value of the interest received. 24 If the creditor receives a profits interest, the liquidation value is zero, and therefore the partnership recognizes COD income equal to the amount of debt transferred.

Corporate Transactions

Debt transfers between corporations and shareholders are just as likely as transfers between partners and partnerships. If the transferor is a shareholder or becomes a shareholder as a result of the transaction, Secs. 1032, 118, and 351 provide basic nontaxability. However, Sec. 108 overrules these sections in certain cases.

If the shareholder transfers the debt to the corporation as a contribution to capital, Sec. 108(e)(6) may result in the recognition of COD income by the corporation. Under Sec. 108(e)(6), the corporation is treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness. Therefore, the corporation has COD income amount equal to the excess of the face amount of the debt over the transferor’s basis in the debt immediately prior to the transfer. In most cases, the face and basis are equal, and no COD income is recognized. If the transfer is in exchange for stock, Sec. 108(e)(8)(A) provides that the corporation is treated as having satisfied the indebtedness with an amount of money equal to the FMV of the stock. Therefore, the corporation recognizes COD income equal to the excess of the face value of the debt over the value of the stock received. In many cases, the value of the stock is less than the debt canceled, and therefore COD income is recognized. Sec. 351 provides that 80% creditor/shareholders recognize neither gain nor loss if the debt is evidenced by a security. If Sec. 351 does not apply, the creditor/shareholder may be able to claim a loss or bad-debt deduction.

Rev. Rul. 2004-79 25 provides a detailed analysis of the transfer of debt from a creditor corporation to a debtor shareholder. The analysis is similar to the one for partnership distributions covered by Rev. Rul. 93-7, discussed previously.

Modifying the facts of Rev. Rul. 2004-79, assume that a shareholder borrows money from his corporation. The face amount of the debt is $1,000, and the issue price is $920. The original issue discount (OID) of $80 is amortized by both the corporation and the shareholder. At a time when the adjusted issue price and basis are $950 but the FMV is only $925, the corporation distributes the debt to the shareholder as a dividend.

From the corporation’s point of view, this is a property dividend. Rev. Rul. 2004- 79 cites Rev. Rul. 93-7, but it could just as easily have cited Kniffen . As a property dividend, the transaction’s taxa tion to the corporation is governed by Sec. 311. Since the value in the revenue ruling was less than the basis, the corporation recognized no gain or loss. If the value had appreciated, the corporation would have recognized gain equal to the appreciation.

The shareholder receives a taxable dividend equal to the value of the debt; consequently, the debt has a basis equal to its FMV of $925. Since the debt is automatically extinguished, the shareholder is treated as having satisfied an obligation in the amount of $950 with a payment of $925. Therefore, the shareholder must recognize $25 of COD income.

A second fact pattern in the revenue ruling is the same, except the value of the distributed debt is $1,005. Under these facts, the shareholder would be entitled to an interest expense deduction under Regs. Sec. 1.163-4 or 1.163-7 in the amount of $55 ($1,005 − $950). In other words, the shareholder is deemed to have reacquired its own debt for a payment equal to the basis that the distributed debt obtains in the transaction.

The conclusions of Rev. Rul. 2004-79 are consistent with those in Rev. Rul. 93-7. They follow the reasoning of Kniffen .

Another transaction that could occur involving shareholder debt is a liquidation of the corporation, resulting in a distribution of the debt to the debtor/shareholder. The results should be similar to those in Rev. Rul. 2004-79. The corporation that distributes the debt is taxed under Sec. 336. Therefore, the corporation recognizes gain or loss depending on the basis of the debt and its FMV. This is the same result as in the dividend case, except that the loss is recognized under Sec. 336 instead of being denied under Sec. 311. The shareholder’s basis in the debt is its FMV under Sec. 334(a). The shareholder recognizes COD income or interest expense, depending on whether the basis is less than or greater than the adjusted issue price of the debt. These results flow from the regulations under Secs. 61 and 163 and are consistent with the conclusions in the above revenue rulings.

The results change slightly if the liquidation qualifies under Secs. 332 and 337. The IRS discussed these results in Chief Counsel Advice 200040009. 26 Sec. 332 shields the parent from recognition of income on the receipt of the debt. Sec. 337 shields the liquidating corporation from recognizing gain or loss on the transfer of the debt to its parent corporation. The basis is carryover basis under Sec. 334(b). Then, because the debt is extinguished, the parent recognizes either COD income or interest expense on the extinguishment of the debt. As in the prior revenue rulings and Kniffen , the extinguishment has to be a taxable event because the elimination of the carryover basis prevents the parent corporation from having a taxable transaction in the future involving this debt. These results are consistent with prior decisions.

The results discussed for a parent/subsidiary liquidation should also apply if the debtor/corporation acquires a corporation that owns its debt in a nontaxable asset reorganization. In this case, Sec. 361 replaces Secs. 332 and 337. The extinguishment of the debt is a separate transaction that should result in recognition of income or expense.

Acquired Debt

So far, this article has discussed transactions between the debtor and creditor. Now it turns to how the holder of the debt acquired it. In many cases, the holder acquired the debt directly from the debtor, and the acquisition is nontaxable. In other situations, the debt is outstanding and in the hands of an unrelated party. The holder acquires the debt from this unrelated party. In these cases, Sec. 108(e)(4) may create COD income.

Under Sec. 61, if a debtor reacquires its debt for less than its adjusted issue price, the debtor has COD income. Sec. 108(e)(4) expands on this rule: If a party related to the debtor acquires the debt, the debtor is treated as acquiring the debt, with the resulting COD income recognized. Related parties are defined in Secs. 267(b) and 707(b)(1).

The regulations provide that the acquisition can be either direct or indirect. A direct acquisition is one by a person related to the debtor at the time the debt is acquired. 27 An indirect acquisition occurs when the debtor acquires the holder of the debt instrument, where the holder of the debt acquired it in anticipation of becoming related to the debtor. 28 The determination of whether the holder acquired the debt in anticipation of becoming related is based on all the facts and circumstances. 29 However, if the holder acquires the debt within six months before the holder becomes related to the debtor, the acquisition by the holder is deemed to be in anticipation of becoming related to the debtor. 30

In the case of a direct acquisition, the amount of COD income is equal to the adjusted issue price minus the basis of the debt in the hands of the related party. In the case of indirect acquisitions, the calculation depends on whether the debt is acquired within six months of being acquired. 31 If the holder acquired the debt within six months of being acquired, the COD income is calculated as if it were a direct acquisition. If the holder acquired the debt more than six months before being acquired, the COD income is equal to the adjusted issue price minus the FMV of the debt instrument on the date that the holder is acquired.

When a debtor reacquires its own debt, in addition to reporting COD income, the debtor has the debt extinguished as a result of the merger of interests. When a related party acquires the debt, the debtor has COD income, but the debt remains outstanding. In these cases, the debtor is treated as issuing a new debt instrument immediately following the recognition of the COD income for an amount equal to the amount used to calculate the COD income (adjusted basis or FMV 32 ). If this issue price is less than the stated redemption price at maturity of the debt (as defined in Sec. 1273(a)(2), the difference is OID that is subject to the amortization rules of Sec. 1272.

Rev. Rul. 2004-79 provides a simple example of this transaction. In the ruling, a parent corporation, P , issued $10 million of debt for $10 million. After issuance, S , a subsidiary of P , purchased the debt for $9.5 million. Under Regs. Sec. 1.108-2(f), P had to recognize $500,000 of COD income ($10 million face − $9.5 million basis to S ). After this recognition, P was treated as having issued the debt to S for $9.5 million. Therefore, $500,000 of OID was amortizable by P and S . If S later transfers the debt to P , the previously discussed rules determine the taxation of the transfer using S ’s basis ($9.5 million + amortized OID).

Secs. 61 and 108(e)(4) apply only if the debt is acquired for less than the adjusted issue price. If the acquisition price is greater than the adjusted issue price, the acquiring party treats this excess as premium and amortizes it, thereby reducing the amount of interest income recognized by the holder.

Installment Obligations

An installment obligation differs from other obligations in that the holder recognizes income when cash is collected in payment of the obligation. The rules describing the taxation of installment obligations were rewritten as part of the Installment Sales Revision Act of 1980, P.L. 96-471. Under old Sec. 453(d) (new Sec. 453B(a)), if the holder of an installment obligation distributes, transmits, or disposes of the obligation, the taxpayer is required to recognize gain or loss equal to the difference between the basis in the obligation and the FMV of the obligation. There is an exception to this rule for distributions in liquidation of a subsidiary that are exempt from taxation under Sec. 337.

Prior to the Code revision, the regulations permitted the transfer of installment obligations without gain recognition if the transaction was covered by either Sec. 721 or 351. 33 Although the regulations have not been revised for the Code change, the IRS continues to treat Secs. 721 and 351 as overriding the gain recognition provision. 34

If the transaction results in transfer of the obligation either from the creditor to the debtor or from the debtor to the creditor, the tax result changes. The seminal case is Jack Ammann Photogrammetric Engineers, Inc. 35 In it, the taxpayer created a corporation to which he contributed $100,000 in return for 78% of the corporation’s stock. He then sold his photogrammetry business to the corporation for $817,031. He received $100,000 cash and a note for $717,031. He reported the sale under the installment method. When he was still owed $540,223 on the note, he transferred it to the corporation for stock of the corporation worth $540,223. He reported this as a disposition under Sec. 453(d) and recognized the deferred gain. Later, he filed a claim for refund, arguing that Sec. 351 prevented recognition of the deferred gain. After allowing the refund, the IRS assessed a deficiency against the corporation, arguing that the corporation came under Sec. 453(d). The corporation argued that, under Sec. 1032, it was not taxable. The Tax Court ruled for the IRS.

The Fifth Circuit reversed the decision. The underlying reasoning was that the disposition by the shareholder and the extinguishment of the debt in the hands of the corporation were separate transactions. The extinguishment did not fall under Sec. 453(d). The court indicated that the IRS should have assessed the tax against the shareholder.

Following this case, the IRS issued Rev. Rul. 73-423. 36 In this ruling, a shareholder transferred an installment obligation from Corporation X back to the corporation in a transaction described in Sec. 351. The ruling concluded that the transfer was a satisfaction of the installment agreement at other than face value under Sec. 453(d)(1)(A) and that the shareholder was required to recognize gain without regard to Sec. 351. The corporation had no gain or loss under Sec. 1032 and Ammann .

Sec. 453(d) is now Sec. 453B(a), and the rule has not changed. Therefore, if a creditor transfers an installment obligation to the debtor in an otherwise tax-free transaction, the obligation is treated as satisfied at other than its face value, and the creditor is required to recognize gain or loss as discussed in Rev. Rul. 73-423. 37

New Sec. 453B(f) covers transactions in which installment obligations become unenforceable. This section covers the extinguishment of an installment debt through a merger of the rights of a debtor and creditor. The Code treats these transactions as dispositions of the obligation with gain or loss recognized. When the debtor and creditor are related, the disposition is at FMV but no less than the face amount.

If the debtor of an installment obligation engages in a transaction in which the creditor assumes the debt, the results are consistent with those of transactions involving obligations other than installment notes. The debtor is deemed to have received cash equal to the amount of the debt. This is fully taxable unless exempted by Sec. 357, 721, or a similar provision. The creditor falls under Sec. 453B(f), with the extinguishment treated as a taxable disposition of the obligation for its FMV (which for related parties is no less than the face amount).

Business entities often incur debts to their owners, and, conversely, the owners incur liabilities to their business entities. In numerous transactions these obligations are canceled for consideration other than simple repayment of the debt. Based on Kniffen , these transactions are treated as a transfer of consideration followed by an extinguishment of the debt. If a shareholder’s debt to his or her controlled corporation is transferred to that corporation along with assets, the transaction may be tax free under Secs. 351 and 357(a). If a shareholder/creditor receives the related corporate debt in a distribution or liquidation, Sec. 311 or 336 determines the corporation’s taxation.

The cancellation of a partner’s debt to the partnership is generally governed by the distribution rules, including the constructive sale or compensation rules of Sec. 707(a)(2). When a partner cancels the partnership’s debt, the partner has made a contribution to capital. This can have consequences to all partners since the total liabilities are decreased and the partners’ bases are decreased under Sec. 752.

In most cases the merger of debtor and creditor interests is nontaxable. However, if the basis of the debt or receivable does not equal the face amount of the debt, income or loss is recognized. The exact amount and character of the income or loss depends on factors discussed in this article. It is important for the tax adviser to identify those cases in which the debt transfer is not tax free.

1 Invalid loans to shareholders have been reclassified as dividends.

2 Kniffen , 39 T.C. 553 (1962).

3 Edwards Motor Transit Co. , T.C. Memo. 1964-317.

4 Estate of Gilmore , 40 B.T.A. 945 (1939).

5 Rev. Rul. 72-464, 1972-2 C.B. 214.

6 GCM 34902 (6/8/72). The GCM also refers to Sec. 332, which will be dis cussed later.

7 As the GCM points out, by using Sec. 357(a), taxpayers could achieve the same outcome in C reorganizations.

8 See Chief Counsel Advice 200040009 (10/6/00), which suggests Estate of Gilmore ’s requirement of a formal cancellation of debt before COD income is recognized may no longer be valid.

9 General Utilities & Operating Co. v. Helvering , 296 U.S. 200 (1935).

10 Sec. 334(b)(1).

12 Regs. Sec. 1.707-5(a)(6).

13 If the partnership transfers money or other consideration in the transaction, the amount treated as sales proceeds may be limited under Regs. Sec. 1.707-5(a)(5)(i)(B).

14 Under Regs. Sec. 1.707-5(a)(3)(ii), a partner’s share of liabilities is reduced by liabilities assumed that are anticipated to be reduced. Based on Kniffen and Edwards , the reduction will be anticipated.

15 Notice 94-47, 1994-1 C.B. 357.

16 See, e.g., IRS Letter Ruling 8825048 (3/23/88).

17 The transaction that gives rise to the difference and the taxation that results are discussed later.

18 Rev. Rul. 72-464, 1972-2 C.B. 214. Although this is a debtor-to-creditor transfer, the result is the same.

19 See GCM 34902 (6/8/72).

20 Rev. Rul. 93-7, 1993-1 C.B. 125.

21 If the partnership makes a Sec. 754 election, the partnership has a Sec. 734 adjustment of $75 ($100 inside basis – $25 basis after distribution).

22 IRS Letter Ruling 201105016 (2/4/11).

23 Regs. Sec. 1.108-8, effective Nov. 17, 2011.

24 See the Regs. Sec. 1.108-8(b)(2) safe-harbor rule.

25 Rev. Rul. 2004-79, 2004-2 C.B. 106.

26 CCA 200040009 (10/6/00).

27 Regs. Sec. 1.108-2(b).

28 Regs. Sec. 1.108-2(c)(1).

29 Regs. Sec. 1.108-2(c)(2).

30 Regs. Sec. 1.108-2(c)(3).

31 Regs. Secs. 1.108-2(f)(1) and (2).

32 Regs. Sec. 1.108-2(g).

33 Regs. Sec. 1.453-9(c)(2).

34 See IRS Letter Rulings 8824044 (3/22/88) and 8425042 (3/19/84).

35 Jack Ammann Photogrammetric Engineers, Inc. , 341 F.2d 466 (5th Cir. 1965), rev’g 39 T.C. 500 (1962).

36 Rev. Rul. 73-423, 1973-2 C.B. 161.

37 Although this revenue ruling involved a corporation, the IRS believes the same rule applies to partnerships. Treasury is currently working on a revision of the regulations to clarify the results. See the preamble to Regs. Sec. 1.108-8, T.D. 9557 (11/17/11).

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Assignment of Debt – What You Need to Know

By aqila zulaiqha zulkifli ~ 23 june 2023.

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Aqila Zulaiqha Zulkifli

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Occasionally, to ensure liquidity and to reduce financial risk, a creditor may assign its rights to a debt repayment to another party. Such an arrangement is known as the assignment of debt.

An assignment generally means the transfer of contractual rights and liabilities to a third party without the concurrence of the other party to the contract. [1] The assigning party is known as the assignor, whereas the recipient party is known as the assignee.

Once an assignment occurs, the assignee stands in the exact position as the assignor and has the legal right to a debt, other remedies therein, and even the power to discharge the debt. The debtor must then, make all payments to the assignee, and not the assignor. In fact, if the debtor pays the assignor without the consent of the assignee, the debtor may risk having to pay the assignee all over again. [2]

An assignment of debt is governed by Section 4(3) of the Civil Law Act 1956 (the “Act”) (cited with approval in the Federal Court case of UMW Industries Sdn Bhd v Ah Fook [3] , in which, the elements of a statutory assignment of debt can be summarized as follows:

• the assignment must be in writing under the hand of the assignor (and not, i.e the agent of the assignor);
• the assignment must be absolute and not by way of charge only; and
• the express notice in writing must have been given to the person liable to the assignor (i.e the debtor).

The effect of a statutory assignment is that the assignee possesses the legal right to the debt and the right to sue the debtor in respect of the debt without needing to join the assignor. [4]

However, rest assured, an assignment that is not in compliance with Section 4(3) of the Act is not automatically invalid. A non-statutory assignment could still be valid in equity [5] , though the assignee would have to join the assignor in the proceeding, either as a plaintiff or defendant [6] . This is to ensure a just disposal of the action, by ensuring that all relevant parties are before the Court so that the assignor would not make a claim against the debtor in respect of the same debt.

As such, in conclusion, before accepting an assignment of debt, it is prudent for an assignee to ensure that the elements in Section 4(3) of the Act abovementioned are fulfilled. If the assignment is meant to be absolute, such terms should be clearly reflected in the deed of assignment, or the assignee runs the risk of being crippled in a legal proceeding to recover the debt in the absence of the assignor.

[1] United General Insurance Co Sdn Bhd v Progress Credit Sdn Bhd [1988] 2 MLJ 297

[2] malayawata steel berhad v government of malaysia & anor [1980] 2 mlj 103, [3] [1996] 1 mlj 365, [4] mbf factors sdn bhd v tay hing ju (t/a new general trading) [2002] 5 mlj 536, [5] khaw poh chhuan v ng gaik peng & ors [1996] 1 mlj 761 (fc), [6] chan min swee v melawangi sdn bhd [2000] 7 clj 1.

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How does living overseas impact your HECS debt?

My daughter is a recent graduate and plans to work in the UK for the next 3-4 years. Will her HECS repayments or indexation be calculated differently than if she lived in Australia?

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Hello @Kate108 ,

If your daughter earns above the minimum repayment threshold for Australian residents while living overseas, she will still be required to make repayments towards her HECS debt. The minimum repayment threshold is based on her worldwide income and is subject to change each year. It's essential for her to notify the Australian Taxation Office (ATO) of her worldwide income to ensure that repayments are calculated correctly.

 The indexation of HECS debt occurs annually based on the Consumer Price Index (CPI). This indexation applies regardless of whether your daughter is living in Australia or overseas. The ATO will adjust the outstanding HECS debt to reflect changes in the cost of living.

Your daughter will have reporting obligations to the ATO regarding her worldwide income, regardless of her residency status. She must accurately report her income earned both in the UK and any other country to ensure that her HECS repayments are calculated correctly.

Australia has tax treaties with various countries, including the UK, to prevent double taxation of income. These treaties may impact how income earned in the UK is treated for Australian tax purposes, including HECS repayments. It's advisable to seek professional tax advice to understand the implications of these treaties fully.

It's crucial for your daughter to maintain communication with the ATO regarding her residency status, income earned overseas, and any changes in her circumstances. This will ensure that her HECS repayments are calculated accurately and that she remains compliant with Australian tax laws.

Overall, while living overseas may impact how HECS repayments are calculated, your daughter will still be required to fulfill her obligations regarding her HECS debt to the Australian government. It's essential for her to stay informed, seek professional advice if needed, and communicate effectively with the ATO to manage her HECS debt responsibly.

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The Australian Taxation Office (ATO) will soon be forced to pay a new tax just to help collect around $50 billion in outstanding tax money owed to the government in the form of post-COVID tax debts, as well as regular receivables, where commercial recovery agents are used to expedite collection.

Yep, you read that right. The government will soon be putting a new tax on the collection of tax, a quirk that flows from a new edict from the Department of Finance that financially penalises agencies that use outsourcers by extracting a new levy on work they send out of the Australian Public Service.

Revealed earlier this month by Finance and the Public Service Minister Katy Gallagher as part of a parade of savings measures to be included in Tuesday’s budget, the “additional external labour levy” revealed this month is slated to generate $375 million over four years from 2024-25.

The internal accounting mechanism appears intended to send a price signal to agencies otherwise unwilling or unable to swap out labour hire, outsourcers or contractors for permanent APS staff.

However, a key area the new outsourcing levy is set to hit hard is commercial debt recovery and management, where the ATO is one of the biggest clients, after the utilities sector and retail banks.

The ATO has confirmed to The Mandarin that debt-collection outsourcing is set to be hit by the outsourcing levy.

“The ATO looks to deploy a diverse workforce across its large portfolio of work,” an ATO spokesperson said.

“In response to this latest direction from Government, and consistent with the recently released APS Strategic Commissioning Framework, the ATO is in the planning stages of implementing this newly announced Measure.”

Government debt that is enforceable is prized by recovery agents because agencies are essentially paid on a time and materials basis rather than buying a debt ‘book’ or ‘ledger’ for a number of cents in the dollar they then have to try and recoup.

At the same time, government agencies have far greater powers to resolve outstanding debt, like seeking garnishee orders that allow them to access people’s tax refunds and potentially social security benefits.

According to government contract notifications, one of the biggest debt recovery suppliers to the ATO Recoveries Corporation was awarded a contract now worth $11.5 million for debt recovery and management services that commenced on October 14, 2022, and runs through until June 28, 2024.

Procurement records show the Recoveries Corporation contract was amended just one year into the deal on October 18,  2023, to boost the amount spent by $4.45 million. A further contract handed to the firm is worth $3.6 million,

Also listed under the category of “debt management” contracts for the ATO is a $16.1 million contract with long-term contact centre outsourcer Datacom Connect, with the description for the contract listed as “provision of labour services”.

However, it’s not just the ATO who has used debt recovery firms to claw back money owed to the government. Services Australia previously awarded both Illion and Probe Group outsourced debt collection contracts, with the most recent contracts listed as being worth $6.6 million and $5.2 million respectively. However the agency has entirely insourced debt recovery since the robodebt royal commission.

The Department of Education and the Department of Employment and Workplace Relations also retain debt collectors, albeit to a far lesser degree.

One of the reasons government agencies prefer to use debt collection outsourcers is that it’s hard to attract public servants to do the work, not least because it’s a tough gig that often requires difficult conversations with clients.

Most debt management and recovery firms rotate their staff across a variety of work, varying from commercial factoring to consumer and insolvency books, with social security and mortgage work regarded as some of the most difficult.

Gallagher hits APS agencies with new outsourcing tax

Julian Bajkowski is a research and technical-driven reporter with over 20 years’ experience in technology and cybersecurity journalism. Julian has also been an adviser in public policy and corporate affairs for Mastercard and eftpos.

Tags: 2024 budget APS Strategic Commissioning Framework ATO Australian Taxation Office by Minister for Finance and the Public Service Datacom Connect debt collection Department of Education and the Department of Employment Department of Finance factoring Katy Gallagher receivables management Recoveries Corporation robodebt workplace relations

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How do I get the $300 energy bill rebate? Here's where you'll see the federal budget benefits

Have you heard about a bunch of benefits people are getting from Tuesday night's federal budget?

In case you missed it, Treasurer Jim Chalmers spoke about a few measures that could put extra money in your pocket, including:

• A $300 energy bill rebate for every household
• The stage 3 tax cuts
• Changes to student debt

From all the chatter about this, it might sound like you'll be getting a cash payment from the government in the coming days. 

But it doesn't work like that.

So don't expect a cheque in the mail or money transferred directly into your bank account. 

Here's what you need to know about rebates, credits and tax cuts. 

How do I get the $300 energy rebate?

It'll automatically be taken off your power bill . 

But your next bill won't be $300 cheaper, because the rebate is being applied quarterly . 

Who is eligible for the $300 rebate?

The rebate will be credited to every Australian household's power bill. 

The word "household" is key here.  

The rebate will only be applied to each household — not every person who lives in that household. 

It's not a $300 payment that every person will receive individually . 

What are the stage 3 tax cuts?

When you hear someone talking about "stage 3 tax cuts", they're referring to changes to Australia's tax brackets and taxation rates .

And these changes will result in a saving for all Australians who earn above the tax-free threshold — because it'll mean paying slightly less tax. 

You can use the calculator below to work out how much you'll save in tax under the changes:

But it's important to remember that you won't be getting this money as a separate payment .

How will I get my tax-cut money?

From July 1, the Australian Taxation Office will take less money from the take-home pay of all taxpayers.

That means you'll keep more of the money you earn.

In most cases, you don't have to do anything to receive the tax cut, it will happen automatically. 

What are the new tax brackets?

These will be the new tax brackets as of July 1: 

• Earn  up to $18,200  –  pay no tax
• Pay a  16 per cent  tax rate on each dollar earned between  $18,201–$45,000
• Pay a  30 per cent  tax rate on each dollar earned between  $45,001–$135,000
• Pay a  37 per cent  tax rate on each dollar earned between  $135,001–$190,000
• Pay a  45 per cent  tax rate on each dollar earned above  $190,000

Will I get a HECS refund?

The federal government says it is back-dating changes to student debt indexation to last year . 

Back then, the indexation rate was 7.1 per cent.

But under these changes, it'll be lowered to 3.2 per cent. 

If you've still got a HECS debt, the difference will be taken off your current debt . 

And if you completely paid off your debt last year, you'll either get that difference back in your tax refund  or it'll be subtracted from whatever you owe the ATO after filing your tax forms. 

Editor's note (15/05/2024): This story has been updated to clarify how the tax cut will be applied.

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