ATO ID 2003/1118: Company loss: deduction for tax loss incurred in an earlier income year by another taxpayer
Date of decision: 27 October 2003
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Can a taxpayer claim a deduction under section 36-15 of the Income Tax Assessment Act 1997 (ITAA 1997) for a tax loss incurred in an earlier income year by another entity that has merged with the taxpayer?

Decision
No. Under section 36-15 of the ITAA 1997 the taxpayer seeking a deduction for a tax loss of an earlier income year must be the same taxpayer that originally incurred that tax loss.

Facts
Company A and Company B both traded as registered clubs under the Registered Clubs Act 1976 (NSW). Company A incurred a tax loss in an earlier income year. Subsequently Company A and Company B amalgamated to form one registered club. The merger occurred in accordance with subsection 17A(1) of the Registered Clubs Act which provides: 17A(1) In this section, a reference to the amalgamation of 2 or more registered clubs is a reference to an amalgamation to be effected- (a) by the dissolution of those clubs and the formation of a new club (b) by the continuation of one of those clubs and the dissolution of the other club or clubs. The merger was effected by Company A being liquidated and its assets and liabilities being acquired by Company B which continued to carry on the registered club business formerly conducted by Company A.

Reasons for decision
Summary: Division 36 of the ITAA 1997 provides for the deduction of tax losses incurred in earlier income years. Section 36-10 of the ITAA 1997 provides that the tax loss for an income year is the excess of deductions over the sum of assessable income and net exempt income. That section uses the expression 'your tax loss' when describing the situation where a taxpayer has such an excess of deductions over the sum of assessable income and net exempt income for a particular income year. Section 36-15 of the ITAA 1997 specifies how a taxpayer should deduct a tax loss in a later income year: Section 36-15 of the ITAA 1997 refers to 'your total assessable income', 'your total deductions' and 'your net exempt income'. Accordingly there is a requirement for the taxpayer that seeks a deduction for a tax loss of an earlier income year, to be the same taxpayer that originally incurred the tax loss. Company A and Company B amalgamated in accordance with subsection 17A(1) of the Registered Clubs Act - as in Case 52/96 96 ATC 498; AAT Case 11,196 33 ATR 1174. The merger was effected by the continuation of Company B and by the dissolution of Company A. Upon amalgamation therefore, Company A ceased to exist as a legal entity. Company B continued as a legal entity, separate and distinct from the dissolved Company A. Company A had a tax loss for an earlier income year. Company B is not entitled to a deduction for this tax loss under section 36-15 of the ITAA 1997 because, as a separate legal entity, it was not the taxpayer that originally incurred the tax loss involved.

Legislative references: Income Tax Assessment Act 1997 Division 36 section 36-10 section 36-15
Case references: Case 52/96 96 ATC 498
Subject references: Associations, organisations & societies Prior year losses Tax loss