Tax benefits from unused company tax losses

Will section 175-15 of the Income Tax Assessment Act 1997 ('ITAA 1997') apply to deny a deduction to a company for losses carried forward against distributions of income received from a discretionary trust that is controlled by the shareholders (individuals) of the company?

No. Pursuant to subsection 175-15(2) of the ITAA 1997, it is considered to be fair and reasonable for the Commissioner to allow a deduction to the company for losses carried forward against distributions of income from a trust which is controlled by the shareholders (individuals) of the company.

All shares of the company have been held equally by two individuals since its incorporation. All shares on issue carry the same rights.

The company recently sold its business to a non-related purchaser and presently has carried forward losses.

The property from which the company formerly conducted its business is owned by a related discretionary trust (Trust) that is controlled by the same two individuals. This property is now rented to the purchaser of the business and generates the main income of the Trust.

The shareholders of the company have been the only beneficiaries of the Trust. The trustee is to distribute all future net income of the Trust to the company which is to claim a deduction for carried forward losses against this income.

The existing shareholders rights and interests in the company are to remain unchanged.

Subdivision 175-A of the ITAA 1997 contains various anti-avoidance rules relevant to prior year losses.

Section 175-15 of the ITAA 1997 outlines the second case for denying a deduction where someone else obtains a tax benefit because of tax loss available to company.

Subsection 175-15(1) of the ITAA 1997 enables the Commissioner to disallow a loss where a person has received any tax benefit as a result of a scheme entered into because of the availability of the loss.

However, this section does not apply where the person has a shareholding interest in the company at some time during the income year and the Commissioner considers the tax benefit to be fair and reasonable having regard to the shareholding interest [subsection 175-15(2) of the ITAA 1997].

Income will be distributed from the related trust to the company with an offsetting deduction for prior year losses being claimed by the company. There is a tax benefit as this income would otherwise be assessed to the trustee of the trust or to beneficiaries of the trust (at the discretion of the trustee).

However, as the primary beneficiaries of the trust have continuously maintained a 100 per cent beneficial ownership of shares in the company since its incorporation and this shareholding interest is to remain the same throughout implementation of the proposal, it follows that the persons who are to gain the tax benefit from the proposal have always been, and will continue to be, the sole beneficial owners of the shares. Accordingly, the tax benefit is fair and reasonable having regard to the shareholding interest. Therefore subsection 175-15 of the ITAA 1997 will not apply to enable the Commissioner to disallow a claim by the company for prior year tax losses. (Note: Subdivision 175-A sets out two cases where the Commissioner may disallow a tax loss. This ATO ID deals only with section 175-15. Section 175-10 of the ITAA 1997 must also be considered. See related ATO ID on the operation of section 175-10 of the ITAA 1997).