Deducting tax loss of earlier income year: disqualifying change of company ownership in loss year - when company can deduct part of a tax loss

Can a company claim a deduction for any part of a tax loss if there was a change in majority ownership of the company during the loss year and the company did not satisfy the same business test for the income year?

Yes. Section 165-20 of the Income Tax Assessment Act 1997 (ITAA 1997) will allow the company to deduct the part of the tax loss incurred during the latter part of the loss year if, assuming that part of the loss year had been treated as the whole of the loss year for the purposes of section 165-10 of the ITAA 1997, the company would have been entitled to deduct the tax loss.

A company incurred a tax loss in a particular year (the loss year). During the loss year, the company embarked upon a share capital raising initiative which resulted in a change of ownership under Division 165 of the ITAA 1997. There was no further change in ownership of the company before the end of the income year.

During the income year, the company changed its business and derived taxable income that exceeded the amount of its prior year tax loss.

Section 165-20 of the ITAA 1997 is directed at situations where section 165-10 of the ITAA 1997 prevents a company from deducting a tax loss by reason of a change in ownership during the loss year and failure to satisfy the same business test in the income year. In such a situation, section 165-20 allows a deduction for part of a tax loss incurred during the latter part of the loss year if, assuming that part of the loss year had been treated as the whole of the loss year for the purposes of section 165-10, the company would have been entitled to deduct the tax loss.

The share capital raising initiative resulted in the company being unable to satisfy the conditions in section 165-12 of the ITAA 1997 (which is about the company maintaining the same owners). Further, as the company commenced a new business in the income year, it was unable to meet the conditions in section 165-13 of the ITAA 1997 (which is about the company carrying on the same business). Therefore, section 165-10 of the ITAA 1997 prevented the company from deducting the tax loss in the income year.

However, if the part of the loss year after the share capital raising were treated as the whole of the loss year for the purposes of section 165-10 of the ITAA 1997 (in accordance with the assumption in section 165-20 of the ITAA 1997), the company would be taken to have maintained the same owners on a continuous basis from the deemed start of the loss year (the time of the new share issue) to the end of the year of income. On the basis of this assumption, the company would be entitled to deduct the tax loss. Accordingly, subsection 165-20 enables the company to deduct in the income year the part of the tax loss incurred during the part of the loss year after the new share issue.