Issue
Where a 'commercial debt' is forgiven and the debtor has to apply the 'total net forgiven amount' to deductible revenue losses under Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) do those losses include foreign losses and film losses?
Decision
Yes. Deductible revenue losses, as defined in section 245-110 of Schedule 2C to the ITAA 1936, includes both foreign losses deductible under section 160AFD of the ITAA 1936 and deductible tax losses resulting from film losses pursuant to Subdivision 375-G of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
A company, not being part of a group of related companies, entered into an arm's length loan with an individual. The loan was used in the course of carrying on the company's business.
Subsequently, the individual chose to forgive the outstanding loan amount, including interest, of $18,000 in the 2000-01 year of income (the 'forgiveness year of income') as the company was experiencing severe financial difficulties.
The net forgiven amount of the debt was $18,000.
This was the only debt forgiven in favour of the company in the forgiveness year of income.
Prior to lodging a tax return for the forgiveness year of income, the company had the following deductible revenue losses. Tax losses (excluding film losses): Year ended 30 June 1999 $1,000 Year ended 30 June 2000 $2,000 Tax losses (from film losses in Subdivision 375-G of the ITAA 1997): Year ended 30 June 1999 $4,000 Year ended 30 June 2000 $4,000 Foreign losses (under subsection 160AFD(2) of the ITAA 1936): Year ended 30 June 1997 $6,200 Year ended 30 June 2000 $2,500
Tax losses (excluding film losses):
Year ended 30 June 1999 | $1,000
Year ended 30 June 2000 | $2,000
Tax losses (from film losses in Subdivision 375-G of the ITAA 1997):
Year ended 30 June 1999 | $4,000
Year ended 30 June 2000 | $4,000
Foreign losses (under subsection 160AFD(2) of the ITAA 1936):
Year ended 30 June 1997 | $6,200
Year ended 30 June 2000 | $2,500
The company proposes that the total net forgiven amount be firstly applied to tax losses resulting from film losses, secondly to foreign losses and lastly other tax losses.
Reasons for Decision
Where commercial debts are forgiven after 27 June 1996, the total net forgiven amount in the forgiveness year of income must be applied, in accordance with the provisions of Schedule 2C to the ITAA 1936, to successively reduce the debtor's deductible revenue losses, deductible net capital losses, deductible expenditures and the relevant cost base of certain CGT assets.
Subsection 245-105(5) of Schedule 2C to the ITAA 1936 provides that the total net forgiven amount must firstly be applied, to the maximum extent possible, to reduce deductible revenue losses incurred by the debtor in years of income before the forgiveness year of income.
Under subsection 245-120(1) of Schedule 2C to the ITAA 1936 the debtor can choose the order in which the total net forgiven amount is to be applied to reduce deductible revenue losses.
The table of 'deductible revenue losses' in subsection 245-110 of Schedule 2C to the ITAA 1936 specifies that the term includes tax losses (at item 1) and foreign losses under subsection 160AFD(2) of the ITAA 1936 (at item 3).
Where a tax loss has a film component, section 375-810 of the ITAA 1997 provides that the film component of the tax loss and the rest of the tax loss are separate tax losses. Thus a tax loss resulting from a film loss constitutes a deductible revenue loss under item 1 of subsection 245-110 of Schedule 2C to the ITAA 1936.
Accordingly, after fully applying the total net forgiven amount of $18,000 to tax losses resulting from film losses, foreign losses and other tax losses, the only deductible revenue losses of the company remaining to be carried forward to the 2000-01 year of income are $1,700 tax losses (not being film losses) for the 1999-2000 year of income.