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EZ 40: Accrued income written off
or “How to claim a deduction for unpaid income you've written off as a bad debt”
You could also call this:

“Rules for selling debts to people connected with the borrower”

This law is about what happens when someone sells a debt to a person connected to the person who owes the money. It applies to debts sold on or after 20 May 1999.

If you sell a debt to someone connected to the person who owes the money for 80% or less of what the debt is worth, it’s called selling at a discount.

When working out the value of the debt, you should ignore things like the borrower’s credit getting worse, the chance of them not paying increasing, or anything that reduced what they owe.

If you sell a debt at a discount to someone connected to the borrower, it’s treated as if you gave the borrower an interest-free loan for the amount you paid for the debt.

If the borrower later pays back more than what was paid for the debt, the extra amount is:

  • Something the borrower can claim as an expense
  • Income for the person who bought the debt

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Next up: EZ 42: Post facto adjustment

or “Adjusting tax for unusual changes in financial arrangements”
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Part E Timing and quantifying rules
Terminating provisions: Definitions

EZ 41Disposal of debt to associate of debtor

  1. This section applies to a financial arrangement that is a debt which is disposed of at a discount to a person associated with the debtor on or after 20 May 1999.

  2. A creditor is treated as having disposed of a debt at a discount if the debt is disposed of to a person associated under the 1988 version provisions with the debtor for 80% or less of the market value of the debt.

  3. Subsection (4) applies to a debt that is disposed of if its market value was influenced by—

  4. the decline in the original debtor’s creditworthiness between the date the debt was entered into and the date of disposal; or
    1. an increase in the possibility that the original debtor would not pay an amount owing under the debt between the date the debt was entered into and the date of disposal; or
      1. an event that occurred which reduced or cancelled the original debtor’s obligations under the debt.

        1. For the purposes of subsection (2), a debt’s market value is determined as if its market value were not influenced by a factor listed in subsection (3)(a) to (c).

        2. If a debt is disposed of at a discount to a person associated with the debtor, the associated person is treated as having provided the debtor with an interest free loan for the amount paid for the debt.

        3. If the debtor subsequently repays the person associated with the debtor more than the amount the associated person paid for the debt, the excess amount paid by the debtor is—

        4. a deduction to the debtor; and
          1. income of the person associated with the debtor.

            Compare
            Notes
            • Section EZ 41 heading: amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
            • Section EZ 41(1): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
            • Section EZ 41(2): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
            • Section EZ 41(3): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
            • Section EZ 41(3)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
            • Section EZ 41(3)(b): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
            • Section EZ 41(5): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).