Issue
Is a tax loss that was incurred by the transferor in the forgiveness year of income a deductible revenue loss to be taken into account in determining the respective net forgiven amounts under subsection 245-230(3) of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) of members of a group of related companies?
Decision
No. Though the application of subsection 245-230(3) of Schedule 2C to the ITAA 1936 is based on the company's deductible revenue losses, subsection 245-230(4) of Schedule 2C to the ITAA 1936 provides that a tax loss that was incurred by the transferor in the forgiveness year of income does not constitute a deductible revenue loss.
Facts
Debtor Company and three other companies constitute a group of related companies for the purposes of subsection 245-225(2) of Schedule 2C to the ITAA 1936.
Debtor Company had a debt forgiven in the forgiveness year of income and as a result of the forgiveness of that debt had a net forgiven amount.
Related Company 1 had a tax loss in the forgiveness year of income.
Pursuant Subdivision 170-A of the Income Tax assessment Act 1997 (ITAA 1997) Related Company 1 validly transferred part of that tax loss to Related Company 2 in respect of the forgiveness year of income.
Debtor Company and Related Company 3 had deductible revenue losses incurred before the forgiveness year of income.
Reasons for Decision
As a commercial debt has been forgiven after 27 June 1996 and Debtor Company is a member of a group of related companies Subdivision 245-G of Schedule 2C to the ITAA 1936 can apply.
In determining whether Related Company 2 is taken by subsection 245-230(3) of Schedule 2C to the ITAA 1936 to have a net forgiven amount in respect of the forgiveness of the debt of the Debtor Company, the relevant formula within that subsection is based upon the company's deductible revenue losses.
The company's deductible revenue losses will consist of deductible revenue losses incurred before the forgiveness year of income pursuant to section 245-230 of Schedule 2C to the ITAA 1936.
The only losses of Related Company 2 are those transferred from Related Company 1. Despite those tax losses being incurred in the forgiveness year of income of Related Company 1 they will be deemed, by virtue of subsection 170-15(2) of the ITAA 1997, to have been incurred by Related Company 2 in the year of income preceding the forgiveness year of income.
Pursuant to subsection 245-230(4) of Schedule 2C to the ITAA 1936 a company's deductible revenue losses in respect of the forgiveness year of income do not include a tax loss transferred to the company by another company if the other company incurred the tax loss in the forgiveness year of income.
Accordingly Related Company 2 has no deductible revenue loss that can result in it being taken to have a net forgiven amount under subsection 245-230(3) of Schedule 2C to the ITAA 1936 in respect of the relevant forgiveness.
Subsection 245-230(3) of Schedule 2C to the ITAA 1936 will result in the net forgiven amount being apportioned between Debtor Company and Related Company 3.