Division 175—Use of a company’s tax losses or deductions to avoid income tax
Table of Subdivisions
Guide to Division 175
175-A Tax benefits from unused tax losses
175-B Tax benefits from unused deductions
175-D Shareholding interest in the company
175-1 What this Division is about
The Commissioner can reverse the effect of schemes that, in order to avoid tax, bring together in the same company:
· assessable income; and
· tax losses, or current year deductions, that apart from the scheme would not be fully used.
Table of sections
175-5 When Commissioner can disallow deduction for tax loss
175-10 First case: income injected into company because of available tax loss
175-15 Second case: someone else obtains a tax benefit because of tax loss available to company
175-5 When Commissioner can disallow deduction for tax loss
(1) This Subdivision sets out cases where the Commissioner may disallow some or all of a *tax loss (or of part of a tax loss) (the excluded loss) as a deduction in calculating a company’s taxable income of an income year after the *loss year.
(2) However, the Commissioner cannot disallow the *excluded loss if:
(a) the company fails to meet a condition in section 165-12 (which is about the company maintaining the same owners) in respect of the income year; but
(b) meets the condition in section 165-13 (which is about the company carrying on the same *business) in respect of the income year.
175-10 First case: income injected into company because of available tax loss
(1) The Commissioner may disallow the *excluded loss if, during the income year, the company *derived assessable income some or all of which (the injected income) it would not have derived 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).(2) However, the Commissioner cannot disallow the *excluded loss if the *continuing shareholders will benefit from the derivation of the *injected income to an extent that the Commissioner thinks fair and reasonable having regard to their respective rights and interests in the company.
(3) 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.
See section 165-12 (which is about the company maintaining the same owners).
175-15 Second case: someone else obtains a tax benefit because of tax loss available to company
(1) 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).
(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.
(3) An expression means the same in this section as in Part IVA of the Income Tax Assessment Act 1936.
Table of sections
175-20 Income injected into company because of available deductions
175-25 Deduction injected into company because of available income
175-30 Someone else obtains a tax benefit because of a deduction or income available to company
175-35 Tax loss resulting from disallowed deduction
175-20 Income injected into company because of available deductions
(1) The Commissioner may disallow deductions of a company (or parts of them) for an income year if:
(a) the company has *derived assessable income some or all of which (the injected income) it would not have derived if it did not have those deductions; and
(b) the income was derived in that income year.
The disallowed deductions and parts of deductions may exceed the amount of the injected income.
Note: The disallowance may result in a tax loss for the income year. See section 175-35.
(2) The Commissioner cannot disallow the deductions or parts of the deductions if the *continuing shareholders will benefit from the derivation of the *injected income to an extent that the Commissioner thinks fair and reasonable having regard to their respective *shareholding interests in the company.
(3) The continuing shareholders are the individuals who had *shareholding interests in the company both immediately before the *injected income was *derived, and immediately afterwards.
175-25 Deduction injected into company because of available income
(1) The Commissioner may disallow a deduction of a company for an income year to the extent that the company would not have incurred the loss, outgoing or expenditure that the deduction is for if it had not *derived some or all of the assessable income it derived in that income year.
Note: The disallowance may result in a tax loss for the income year. See section 175-35.
(2) The Commissioner cannot disallow any of the deduction if:
(a) the *continuing shareholders will benefit from any profit or advantage that has arisen or might arise directly or indirectly from the loss, outgoing or expenditure being incurred; and
(b) the Commissioner thinks that the extent to which they will benefit is fair and reasonable having regard to their respective *shareholding interests in the company.
(3) The continuing shareholders are the individuals who had *shareholding interests in the company both immediately before the loss, outgoing or expenditure was incurred, and immediately afterwards.
175-30 Someone else obtains a tax benefit because of a deduction or income available to company
(1) The Commissioner may disallow a deduction of a company if:
(a) a person (other than the company) 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 company had not incurred some or all (the available expense) of the loss, outgoing or expenditure that the deduction is for.
However, the deduction may be disallowed only to the extent of the available expense.
(2) The Commissioner may disallow deductions of a company (or parts of them) 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 company had not *derived some or all (the available income) of the assessable income it derived:
(i) before it incurred the losses, outgoings or expenditure that the deductions were for; and
(ii) in the same income year as it incurred them.
The disallowed deductions and parts of deductions may exceed the amount of the available income.
Note: The disallowance may result in a tax loss for the income year. See section 175-35.
(3) An expression means the same in this section as in Part IVA of the Income Tax Assessment Act 1936.
(4) The Commissioner cannot disallow under this section if:
(a) the person who has obtained or will obtain the tax benefit 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.
175-35 Tax loss resulting from disallowed deductions
(1) If a company has a taxable income for an income year because the Commissioner disallows under this Subdivision deductions of the company for the income year (or parts of them), the company may also have a tax loss for the income year.
(2) The company’s tax loss for the income year is calculated as follows.
(3) Total what the Commissioner has disallowed under this Subdivision.
(4) If the company has exempt income for the income year, subtract its *net exempt income.
(5) Any amount remaining is the company’s tax loss for the income year, which is called a loss year.
To find out how much of the tax loss can be deducted
in later income years: see Subdivision 165-A.
To find out how to deduct it: see section 36-15.
[The next Subdivision is Subdivision 175-D.]
Subdivision 175-D—Shareholding interest in the company
175-65 When a person has a shareholding interest in the company
(1) A person has a shareholding interest in the company if the person is the beneficial owner of:
(a) *shares in the company; or
(b) an interest in *shares in the company.
(2) A person also has a shareholding interest in the company if:
(a) the person has a shareholding interest in another company; and
(b) the other company has a shareholding interest in the company (including one resulting from any other application or applications of this subsection).
[The next Division is Division 195.]