Excess deductions for mining expenditure - another taxpayer obtains tax benefit because of deductions available to a company

Can excess deductions for mining expenditure brought forward from a previous income year pursuant to former Subdivision 330-F of the Income Tax Assessment Act 1997 (ITAA 1997) be subject to the application of section 175-30 of the ITAA 1997?

Yes. Carry-forward excess deductions for mining expenditure under former Subdivision 330-F of the ITAA 1997 can be subject to the application of section 175-30 of the ITAA 1997.

Company X carried on a business of mineral exploration during the 1997-98 income year and incurred deductible expenditure under former Subdivision 330-A of the ITAA 1997 that exceeded assessable income for that income year.

In the 1998-99 income year, the mineral exploration activities of Company X were substantially reduced. During that year, Company X became a beneficiary of Trust Y. Trust Y had no prior association with Company X or its shareholders.

Company X received a large distribution from Trust Y in respect of the 1998-99 income year but the excess deductions for mining expenditure brought forward by Company X from the 1997-98 income year were sufficient to offset the amount of the distribution. The shares in Company X were then transferred to the controllers of Trust Y during the 1999-2000 income year.

Section 175-30 of the ITAA 1997 is an anti-avoidance provision that, by virtue of subsection 175-30(1), enables the Commissioner to disallow a deduction of a company if a person (other than the company) has obtained or will obtain a tax benefit in connection with a scheme and the scheme would not have been entered into or carried out if the company had not incurred some or all of the expenditure giving rise to the deduction. However, the Commissioner cannot disallow the deduction if the person had 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 that shareholding interest. Section 175-30 supports section 175-15 of the ITAA 1997 which is expressed in broadly similar terms but specifically enables the Commissioner to disallow the deduction of a tax loss in an income year after the loss year.

Section 175-15 of the ITAA 1997 cannot be applied in the circumstances of the present case because excess mining expenditure, although deductible in a later year in a similar way to a carry forward tax loss, is not a tax loss as defined in the income tax law. However, section 175-30 of the ITAA 1997 could be applied if the excess mining expenditure represented a deduction for the 1998-99 income year.

In this regard, former Subdivision 330-F of the ITAA 1997 provided that total deductions under Subdivision 330-A of the ITAA 1997 could not exceed available assessable income for an income year (former subsection 330-305(2) of the ITAA 1997). It also provided that, in such circumstances, the whole or part of the amount disallowed could be deducted in the next income year for which assessable income was derived (former subsection 330-310(1) of the ITAA 1997).

In the present situation, the excess of deductible mining expenditure over assessable income in the 1997-98 income year would not be allowable as a deduction in that income year by reason of former Subdivision 330-F of the ITAA 1997. However, former Subdivision 330-F would make this same excess specifically deductible in the 1998-99 income year. Hence, the excess mining expenditure is a deduction of Company X in the 1998-99 income year for the purposes of section 175-30 of the ITAA 1997 which could be applied if the other conditions in that section are met.