ATO Interpretative Decision

ATO ID 2005/10

Income tax

Issue

Can the company that has incurred the 'excluded loss' in terms of section 175-5 of the Income Tax Assessment Act 1997 (ITAA 1997) be a 'person' for the purposes of section 175-15 of the ITAA 1997?

Decision

No. A 'person' for the purposes of section 175-15 of the ITAA 1997 means a person other than the company that incurred the 'excluded loss.'

Facts

Company S has a tax loss available to it from an earlier income year which it is now seeking to deduct.

Company S is a listed public company within Division 166 of the ITAA 1997.

Company X and Company Y collectively have more than 50% of the voting power in Company S and rights to more than 50% of the dividends and capital distributions of Company S at the start of the loss year.

Subsequently, Company X acquires beneficial ownership of a further parcel of shares in Company S from Company Y. Following this transaction, Company X alone has more than 50% of the voting power in Company S and rights to more than 50% of the dividends and capital distributions of Company S. Company Y continues to hold a minority percentage of the voting power in Company S and a minority percentage of the rights to the dividends and capital distributions of Company S.

The preceding transaction is the only trading in shares in Company S by either Company X or Company Y at any time during the test period within section 166-5 of the ITAA 1997.

Company S meets the conditions of section 165-12 of the ITAA 1997 as modified by Division 166.

Reasons for Decision

Subsections 175-15(1) and 175-15(2) of the ITAA 1997 provide:

Section 175-15 Second case: someone else obtains a tax benefit because of tax loss available to company

175-15(1) The Commissioner may disallow the *excluded loss if:

(a)

a person has obtained or will obtain a tax benefit in connection with a *scheme; and

(b)

the scheme would not have been entered into or carried out if the excluded loss had not been available to be taken into account for the purposes of:

•

Division 36 (which is about tax losses of earlier years);

•

Division 165 (which is about the income tax consequences of changing ownership or control of a company);

•

Subdivision 375-G (which is about film losses).

175-15(2) However, the Commissioner cannot disallow the *excluded loss if:

(a)

the person had a *shareholding interest in the company at some time during the income year; and

(b)

the Commissioner considers the tax benefit to be fair and reasonable having regard to that shareholding interest.

*denotes a term defined in subsection 995-1(1) of the ITAA 1997

The heading of section 175-15 of the ITAA 1997 states that section 175-15 will apply where 'someone else' obtains a tax benefit because of a tax loss available to a company. The heading of section 175-15 forms part of the ITAA 1997 by virtue of subsection 950-100(1) of the ITAA 1997.

Subsection 175-15(2) of the ITAA 1997 provides that 'the person had a shareholding interest in the company'. Therefore the 'person' for the purposes of section 175-15 cannot be the company that is seeking to deduct a tax loss.

Accordingly the Commissioner may only disallow a tax loss under section 175-15 if a person other than the company that incurred the 'excluded loss', has obtained or will obtain a tax benefit in connection with a scheme, and that scheme would not have been entered into or carried out if the tax loss had not been available.

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   Division 36
   Division 165
   section 165-12
   Division 166
   section 166-5
   section 175-5
   section 175-15
   subsection 175-15(1)
   subsection 175-15(2)
   Subdivision 375-G
   subsection 950-100(1)

Keywords
Prior year losses
Tax loss

Siebel/TDMS Reference Number:  4348235

Business Line:  Public Groups and International

Date of publication:  14 January 2005

ISSN: 1445-2782