Excess deductions for mining expenditure - income injected into company because of available deductions

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 175-20 of the ITAA 1997?

Yes. Carry-forward excess deductions for mining expenditure under former Subdivision 330-F of the Income Tax Assessment Act 1997 (ITAA 1997) can be subject to the application of section 175-20 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 income 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 175-20 of the ITAA 1997 is an anti-avoidance provision that enables the Commissioner to disallow deductions of a company 'for an income year' if the company has derived assessable income or a capital gain in the income year that would not have been derived if the company did not have those deductions. However, the Commissioner cannot disallow the deductions if the continuing shareholders of the company will benefit from the derivation of the income or gain (the 'injected amount') to an extent that the Commissioner thinks fair and reasonable having regard to their respective shareholding interests in the company. Section 175-20 supports section 175-10 of the ITAA 1997 which is expressed in similar terms but specifically enables the Commissioner to disallow the deduction of a tax loss in an income year after the loss year.

Section 175-10 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 175-20 of the ITAA 1997 could be applied if the excess mining expenditure were a deduction 'for an income year', namely 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 'for an income year' (the 1998-99 income year) for the purposes of section 175-20 of the ITAA 1997 which could be applied if the other conditions in that section are met.