ATO Interpretative Decision
ATO ID 2004/949
Income Tax
Deducting tax losses: when loss company can only deduct part of the tax lossFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Can the 'part of the tax loss' made deductible by subsection 165-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997) be the whole of the tax loss?
Decision
Yes. In the particular context of the subsection the term 'part' can encompass the whole where the whole of the tax loss was in fact incurred by the loss company during the relevant part of the loss year which satisfies the conditions in subsection 165-20(2) of the ITAA 1997.
Facts
Loss Company incurred a tax loss in an income year (the loss year).
Loss Company is prevented by section 165-10 of the ITAA 1997 from deducting the tax loss in a later income year (the later income year) because of changes in its ownership and business during the loss year.
Due to those changes Loss Company was required to calculate its tax loss for the loss year under Subdivision 165-B of the ITAA 1997.
Pursuant to section 165-45 of the ITAA 1997 Loss Company was required to divide the loss year into two periods. The first period commenced at the start of the loss year. In respect of that period Loss Company had a notional taxable income under subsection 165-50(2) of the ITAA 1997 of $2,000.
The second period commenced immediately after the end of the first period and ended at the end of the loss year. In respect of the second period Loss Company had a notional loss under subsection 165-50(1) of the ITAA 1997 of $3,000.
In working out Loss Company's tax loss for the loss year under section 165-70 of the ITAA 1997 no full year deductions or other amounts were required to be taken into account, so the tax loss is $3,000.
Based upon the assumption that the relevant ownership test period in subsection 165-12(1) of the ITAA 1997 was from the start of the second period to the end of the later income year, Loss Company sufficiently maintained the same owners such that it would have satisfied section 165-12 of the ITAA 1997 and hence section 165-10 of the ITAA 1997.
Reasons for Decision
Where section 165-10 of the ITAA 1997 prevents a company from deducting a tax loss, subsection 165-20(1) of the ITAA 1997 provides that it can deduct part of the tax loss that was incurred during a part of the loss year, provided that the necessary conditions in subsection 165-20(2) of the ITAA 1997 are satisfied.
Loss Company sufficiently maintained the same owners from the start of the second period to the end of the later year of income, such that section 165-20 of the ITAA 1997 provides that the part of the tax loss that Loss Company incurred in the second period can be deducted.
In the present circumstances the excess of Loss Company's deductions over its assessable income during the second period is such that the whole of its $3,000 tax loss was incurred during the relevant part of the loss year and in accordance with section 165-20 of the ITAA 1997 can therefore be deducted.
Whilst subsection 165-20(1) of the ITAA 1997 explicitly provides that 'the company can deduct the part of the tax loss', the use of the term 'part' in the context of this particular subsection is to be given a broad construction such that it can encompass the whole of the amount of the tax loss and not merely part thereof.
Date of decision: 16 November 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
section 165-10
section 165-12
subsection 165-12(1)
section 165-20
subsection 165-20(1)
subsection 165-20(2)
Subdivision 165-B
section 165-45
subsection 165-50(1)
subsection 165-50(2)
section 165-70
Keywords
Company losses
Continuity of ownership test
Same business test
Tax loss
Date reviewed: 11 September 2017
ISSN: 1445-2782