Edited version of private ruling

Authorisation Number: 1011742801162

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Ruling

Subject: Foreign Loss Attributing Qualifying Companies

Question

Are you entitled to a deduction for a loss incurred by a foreign loss attributing qualifying company (LAQC)?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and your spouse are the sole directors and shareholders in a Country B Loss Attributing Qualifying Company (LAQC) that specialises in domestic rentals in Country B.

The company owns the rental property and receives the rental income.

In Country B, a LAQC can transfer losses to shareholders in a ratio consistent with their shareholding.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

As your Country B dividends are assessable income, it is necessary to consider whether you are allowed a deduction under section 8-1 of the ITAA 1997.

A loss or outgoing is considered to be incurred in gaining or producing assessable income if there is a sufficient connection between the outgoing and the activities which produce or are expected to produce assessable income (Ronpibon Tin NL v FC of T (1949) 78 CLR 47). The essential character of an outgoing is generally determined objectively. As a general rule, an outgoing will not be deductible unless it is incurred in gaining or producing the assessable income of the taxpayer who incurs it.

When you invest in shares, you may be able to claim a deduction for certain expenditure incurred in deriving your income from those shares. For example, if you borrow money to buy shares, you will be able to claim a deduction for the interest incurred on the loan, provided it is reasonable to expect that assessable dividends will be derived from your investment in the shares.

In your case, the rental property is owned by the company. As the company is a separate entity to yourself, it is the company that actually receives the rental income and incurs the losses rather than yourself.

Although you may receive dividends from the company, you are not actually incurring the rental losses. The rental expenses are not sufficiently connected to the earning of your assessable dividend income to be an allowable deduction. As the underlying expenses were not incurred by yourself, you are not entitled to a deduction under section 8-1 of the ITAA 1997. Although Country B allows a Loss Attributing Qualifying Company (LAQC) to transfer losses to their shareholders, there are no provisions in Australian tax law to allow such a transfer or deduction for shareholders for the company's loss.

(NOTE: Section 830 of the ITAA 1997 does not apply to Country B LAQCs).

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