Private ruling: Income tax: Company tax losses: deduction for tax loss incurred in an earlier year prior to incorporation
Date of advice: 27 March 2019
Published: May 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 21 December 2018

Ruling: Q1: After its incorporation as an incorporated association, will the ABC Club Inc be able to utilise carry forward tax losses (under section 36-17 of the Income Tax Assessment Act 1997 ) that were incurred by ABC Club prior to incorporation? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The ABC Club has been a club operating as an unincorporated association for many years. The ABC Club incurred income tax losses in earlier income years. The authorised members of ABC Club registered the ABC Club Inc under the Associations Incorporation Act 1981 (Qld) (the AIA). The ABC Club Inc applied for and has been issued a new tax file number and Australian Business Number.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 36 | section 36-17 | section 36-25 | subsection 960-100(1) | subsection 995-1(1) | Associations Incorporation Act 1981 (Qld) subsection 23(1)

Reasons for decision: Summary: Section 36-17 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out how a corporate tax entity should deduct tax losses of earlier income years. The section refers to: ● a tax loss of an entity ● the later income year of the entity ● the entity's total assessable income for the later income year, and ● the entity's total deductions. The words used in the section refer to a single entity. Accordingly, the entity wishing to deduct prior year tax losses under section 36-17 of the ITAA 1997, must be the same entity that originally incurred the losses. ATO Interpretative Decision ATO ID 2004/811 Income tax: Company tax losses: deduction for tax loss incurred in an earlier year prior to incorporation considered whether an incorporated association could claim a deduction for a tax loss incurred prior to its incorporation under the Associations Incorporation Act 1981 (Qld) (the AIA). The decision was ‘no’ because the incorporated association was not the same taxpayer as the unincorporated association that originally incurred the tax loss. ATO ID 2004/811 explains that an unincorporated association is a voluntary combination of persons with some object or purpose in common (see Kibby v Registrar of Titles and Another [1999] 1 VR 861; [1998] VSC 148). An unincorporated association has no separate or distinct existence apart from its members. An unincorporated association is not an entity at general law. An incorporated association, registered under the AIA, is a body corporate and has its own legal identity as an entity. As discussed in ATO ID 2004/811, a body corporate is: ‘a collection of individuals, united in one body, under a special denomination, having perpetual succession under an artificial form, and vested, by the policy of the law, with a capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, of suing and being sued; of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence.’ For tax purposes, the word ‘entity’ is given further meaning in subsection 960-110(1) of the ITAA 1997 which states: ‘entity’ means any of the following: (a) an individual; (b) a body corporate; (c) a body politic; (d) a partnership; (e) any other unincorporated association or body of persons; (f) a trust; (g) a superannuation fund; (h) an approved deposit fund. The term ‘body corporate’ is not defined for tax purposes, so takes its ordinary meaning ‘a person, association or group of persons legally incorporated in a corporation’ (Macquarie Dictionary online edition retrieved 11 March 2019 from http://www.macquariedictionary.com.au). As such, an unincorporated association is included as an ‘entity’ for tax purposes. Also, an incorporated association is an ‘entity’ for tax purposes. However, regarding whether the same tax entity continues, ATO ID 2004/811 says: ‘For the purposes of the ITAA 1997, subsection 960-110(1) includes unincorporated associations and body corporates separately within the definition of ‘entity’. They are also separately included within the definition of ‘company’ in section 995-1 of the ITAA 1997. The fact that the unincorporated association is a ‘company’ for income tax purposes and, after incorporation the incorporated association is also a ‘company’ for income tax purposes does not make them the same ‘company’ for the purposes of the ITAA 1997.’ Neither the AIA nor the income tax legislation provide for the continuation of the same entity for legal or tax purposes when an unincorporated association registers as an incorporated association. | Detailed Reasoning - Conclusion: Where the members of an unincorporated association choose to register as an incorporated association: ● A new entity with a separate legal identity is created under the AIA ● The AIA does not provide for the continuation of the same entity, and ● The income tax legislation does not provide for the continuation of the same entity for tax purposes. After incorporation, ABC Club Inc is not the same entity as ABC Club. As such, ABC Club Inc cannot utilise the carry forward losses incu rred by ABC Club.