Issue
Where a debt incurred in an earlier income year is written off as bad by a company and it is not practicable for the company to show any period when it satisfied the continuity of ownership test (COT), does the company have a test time for the purpose of applying the same business test (SBT) in order to claim a bad debt deduction?
Decision
Yes. The company's test time for the purpose of applying the SBT is the end of the day on which the debt was incurred pursuant to Item 2 of subsection 165-126(2) of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
Company X is not a listed public company or a 100% subsidiary of a listed public company within Division 166 of the ITAA 1997.
A debt incurred on 1 February 2002 was subsequently written-off as bad by company X during the 2002-03 income year.
Company X is unable to show that COT is satisfied for any period from the date the debt was incurred as, in the circumstances, it is not practicable to obtain details of the ultimate beneficial ownership of shareholdings in a non-resident company.
Reasons for Decision
Section 165-123 of the ITAA 1997 requires, in determining whether a company can deduct a bad debt, that the conditions of COT be satisfied at all times during the ownership test period from the start of the first continuity period (being the day when the debt was incurred), to the end of the second continuity period (being the end of the current year, which in this instance occurs on 30 June 2003).
Where the conditions of section 165-123 of the ITAA 1997 are not satisfied, section 165-126 of the ITAA 1997 provides an alternative SBT condition. Item 1 of subsection 165-126(2) of the ITAA 1997 does not apply to company X as the COT conditions are not satisfied for any period from the start of the first continuity period.
Where Item 1 of subsection 165-126(2) of the ITAA 1997 does not apply and the debt was incurred before the current year, Item 2 of subsection 165-126(2) of the ITAA 1997 provides that the test time for the purpose of applying the SBT is the end of the day on which the debt was incurred.
In accordance with Item 2 of subsection 165-126(2) of the ITAA 1997, company X's test time for the SBT is the end of 1 February 2002.