Private ruling: Company tax losses
Date of advice: 3 April 2018
Published: June 2018
Ruling period: 1 July 2015 to 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the Commissioner seek to disallow a deduction for the carried forward tax losses of the Company pursuant to Subdivision 175-A of the Income Tax Assessment Act 1997 (ITAA 1997) where a Distributing Trust distributes income to the Company? | A1: No.

Relevant facts and circumstances: The Company made a tax loss in the year ended 30 June 2015. The Company intends to recoup the tax loss in the income year ended 30 June 2017. The company has had the same three shareholders at all times from 1 July 2015 to 30 June 2017. They have held exactly the same shares. The shareholders have each provided guarantees and indemnities to a lender in respect of loans to family entities which have directly and indirectly lent funds to the trustees of the trusts which will inject income into the Company. The trustees of discretionary trusts in the family have made family trust elections which are in force from 1 July 2015. Collateral arrangements for the conferral of benefits through income injection schemes involving the Company's tax losses will not be entered into.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 165-12 | subsection 165-12(2) | subsection 165-12(3) | subsection 165-12(4) | subsection 165-12(5) | subsection 165-12(6) | section 165-165 | subsection 165-165(1) | Subdivision 165-D | section 165-207 | subsection 165-207(1) | paragraph 165-207(1)(a) | subsection 165-207(2) | Division 175 | Subdivision 175-A | section 175-10 | subsection 175-10(2) | subsection 175-10(3) | section 175-15 | Subdivision 175-A | section 175-20 | section 175-30 | subsection 175-95(1) | section 995-1 | Income Tax Assessment Act 1936 section 272-75 of Schedule 2F | section 272-80 of Schedule 2F | subsection 272-80(4A) of Schedule 2F | section 272-90 of Schedule 2F | paragraph 272-90(5)(c) of Schedule 2F

Reasons for decision: Summary: The Commissioner will not seek to disallow a deduction for the carried forward tax losses of the Company pursuant to Subdivision 175-A of the ITAA 1997 where a Distributing Trust distributes income to the Company, as: ● the same shareholders will hold the same shares throughout the Ruling Period in the Company; and ● collateral arrangements for the conferral of benefits through income injection schemes involving the Company's tax losses will not be entered into, it is fair and reasonable for the three shareholders to benefit from the prior year carry forward tax losses. For these reasons the Commissioner is prevented by the application of Subdivision 175-A of the ITAA 1997 from disallowing deductions for carried forward tax losses in the Company. | Detailed Reasoning - Detailed Reasoning: Subdivision 175-A of the ITAA 1997 – First case In ATO ID 2010/49 the Commissioner referred to the explanatory memorandum to the Income Tax Assessment Bill 1973 which introduced section 80DA of the ITAA 1936, the predecessor to section 175-10 of the ITAA 1997. From this the Commissioner observed the purpose of section 175-10 of the ITAA 1997: … is to counter collateral arrangements for the conferral of benefits through income injection schemes involving a company's tax losses. These collateral arrangements might otherwise be veiled by the legal shareholdings (as recorded on the company's share register) demonstrating satisfaction of the COT. Section 175-10 of the ITAA 1997 provides that the Commissioner may disallow a deduction for a prior year tax loss in an income year in which the company derives income or capital gains (the injected amount) which it would not have derived if the loss had not been available. However, subsection 175-10(2) of the ITAA 1997 explains that the Commissioner cannot disallow the tax loss if the continuing shareholders will benefit from the derivation of the injected amount to an extent which the Commissioner considers is fair and reasonable. Section 175-10(3) provides: The continuing shareholders are: (a) all of the persons who had *more than 50% of the voting power in the company during the whole (or the relevant part) of the *loss year and during the whole of the income year; and (b) all of the persons who had rights to *more than 50% of the company's dividends during the whole (or the relevant part) of the loss year and during the whole of the income year; and (c) all of the persons who had rights to *more than 50% of the company's capital distributions during the whole (or the relevant part) of the loss year and during the whole of the income year. To find out who they were, apply whichever tests are applied in order to determine whether the company can deduct the *tax loss (or the part of the tax loss) in the first place. Under subsection 175-10(2) of the ITAA 1997 the Commissioner cannot disallow a deduction for a prior year tax loss if the Continuing Shareholders will benefit from the derivation of the injected amount to an extent which the Commissioner considers is fair and reasonable. In determining this, the Commissioner must have regard to the Continuing Shareholders respective rights and interests in the Company. The Continuing Shareholders have owned, and will own throughout the Ruling Period, shares that carried 100% of the voting power in the Company, and rights to 100% of the dividends and capital distributions of the Company, during the 2008 and later income years. For the purposes of the company loss deduction rules, the Company satisfies the conditions of the continuity of ownership test (COT) in section 165-12 of the ITAA 1997. The Continuing Shareholders when the tax losses were incurred will benefit wholly or mainly from any injected amounts. This is because: ● The Continuing Shareholders were the shareholders in the Company in the years in which the Company’s tax losses were incurred to the extent of 100% in respect of the income year ended 30 June 2015 and onwards and they will maintain the same shareholdings throughout the Ruling Period; ● The tax losses of the Company were incurred in the course of conducting the business activities of Family Entities which involve the full involvement of the Continuing Shareholders; ● The Continuing Shareholders have provided Guarantees and Indemnities in respect of finance provided to Family Entities (and indirectly to the Company); and ● The ongoing conduct of the business activities of the Family Entities is dependent upon the servicing of loans Further, any Collateral Arrangements for the conferral of benefits through income injection schemes involving the Company's tax losses will flow only to family members The Commissioner is, therefore, prevented from disallowing deductions for prior year tax losses carried forward by the Company under section 175-10 of the ITAA 1997. Subdivision 175-A of the ITAA 1997 – Second case Subsection 175-15 provides that 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. Section 175-15 of the ITAA 1997 also has application where ‘someone else’ obtains a tax benefit because of tax losses available to the company. Throughout the Ruling Period, the Continuing Shareholders own Shares that carry 100% of the voting power in the Company, and rights to 100% of the dividends and capital distributions of the Company, during the whole of the income year. The term ‘shareholding interest’ is defined in subsection 175-95(1) of the ITAA 1997 and relevantly provides that: A person has a shareholding interest in the company if the person is: (a) the beneficial owner; or (b) the trustee of a *family trust who is the owner; of: (c) *shares in the company; or (d) an interest in *shares in the company. The persons with the ‘shareholding interest’ (the Shareholding Interestholders) are the same as the Continuing Shareholders. Having regard to the scheme facts the tax benefit is fair and reasonable having regard to the shareholding interest. Therefore, the Commissioner is prevented from disallowing deductions for prior year tax losses during the Ruling Period.