Edited version of your private ruling

Authorisation Number: 1012484194665

Ruling

Subject: Deductibility of foreign source losses

Question and answer:

Can rental and/or other passive income-related loss distributions made from country X limited companies (known as look through companies) be included within your Australian tax return and be offset against other income sources resulting in a reduced taxable income for assessment?

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You have part ownership of three look through companies (LTC).

The LTCs prepare company tax returns in country X that reflect the income and expense for the relevant period of lodgement with that country's taxation authority.

Relevant legislative provisions
Income tax assessment Act 1997 Section 6-5

Income tax assessment Act 1997 Section 6-10

Income tax assessment Act 1997 Section 8-1

Reasons for decision

Summary

Although country X allows a look through company to pass on losses to their owners, there are no provisions in Australian tax law to allow such a transfer or deduction for owners for the company's loss.

Detailed reasoning

Assessable income of a resident taxpayer
A resident taxpayer, whether an individual or a company, is generally assessable on ordinary and statutory income derived from all sources whether in or out of Australia (section 6-5 and section
6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)). This means that a resident individual or company should include their worldwide income in their Australian income tax return.

Property ownership
Taxation Ruling TR 93/32: Income tax: rental property - division of net income or loss between co-owners discusses the division of net income or loss between co-owners of a rental property. The ruling advises that the loss or income from a rental property must be shared according to the legal interest of the owners, except in those very limited circumstances where there is sufficient evidence to establish that the equitable (or beneficial) interest is different from the legal title.

An entity's legal interest in a property is determined by the legal title to that property under the relevant land law legislation. The legal owner is recorded on the title deeds issued under that legislation.

Under Australian tax law, a company is treated as a separate and distinct legal entity from the individuals who hold shares in the company. An Australian resident individual shareholder in a company incorporated in country X cannot claim a deduction in respect of losses incurred by the company. This applies whether or not under country X tax law a shareholder might be entitled to claim a deduction in respect of those losses.

If the rental property is owned by the company which is a separate entity to the company's directors or shareholders, it is the company that actually receives the rental income and incurs the losses rather than the individual.

Although the individual may receive dividends from the company, they are not actually incurring the rental losses. The rental expenses are not sufficiently connected to the earning of the individual's assessable dividend income to be an allowable deduction. As the underlying expenses were not incurred by the individual, they are not entitled to a deduction under section 8-1 of the ITAA 1997.