Company tax losses: deduction for tax loss incurred in an earlier year prior to incorporation

Can an incorporated association claim a deduction under section 36-17 of the Income Tax Assessment Act 1997 (ITAA 1997) for a tax loss incurred in an earlier income year prior to its incorporation under the Associations Incorporations Act 1981 (Qld) (AIA Qld)?

No. The incorporated association cannot claim a deduction for the tax loss under section 36-17 of the ITAA 1997 because it is not the same taxpayer as the unincorporated association that originally incurred that tax loss.

The taxpayer, an unincorporated association, incurs a tax loss. In a subsequent year it converts to an incorporated association under the AIA (Qld).

The taxpayer is not an exempt entity under Division 50 of the ITAA 1997.

An unincorporated association has no separate or distinct existence apart from its members. It is a voluntary combination of persons with some object or purpose in common (see Kibby v. Registrar of Titles and Another [1999] 1 VR 861; [1998] VSC 148). Hence, an unincorporated association is not an entity at general law.

By comparison, an incorporated association is a body corporate and is an entity at law. Ford HAJ, 1990, Principles of Company Law, 5th edn, Butterworths, Australia, p. 3. cites the following description of a body corporate from Kyd's, Treatise on the law of corporations (1793) Vol 1 p 13: a collection of individuals, united in one body, under a special denomination, having perpetual succession under an artificial form, and vested, by the policy of the law, with a capacity of acting, in several respects, as an individual, particularly of taking and granting property, of contracting obligations, of suing and being sued; of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of it's institution, or powers conferred upon it, either at the time of its creation, or at any subsequent period of its existence.

For the purposes of the ITAA 1997, subsection 960-100(1) of ITAA 1997 includes unincorporated associations and body corporates separately within the definition of 'entity'. They are also separately included within the definition of 'company' in section 995-1 of ITAA 1997.

The fact that the unincorporated association is a 'company' for income tax purposes and, after incorporation, the incorporated association is also a 'company' for income tax purposes does not make them the same 'company' for the purposes of the ITAA 1997.

The legislation under which the incorporation of the taxpayer was effected (the AIA (Qld)), does not provide for the continuation of the same legal entity. These provisions merely set out the effects of incorporation. (Also see ATO Interpretative Decision 2002/808). Therefore, the incorporated association is not the same entity as the unincorporated association.

Division 36 of the ITAA 1997 provides for the deduction of tax losses incurred in earlier income years.

Section 36-17 of the ITAA 1997 specifies how a corporate tax entity should deduct a loss in a later income year. The section refers to 'the entity's total assessable income' and 'the entity's total deductions'. Accordingly, there is a requirement for the taxpayer that seeks a deduction for a tax loss of an earlier income year, to be the same taxpayer that originally incurred the tax loss. As the incorporated association is not the same legal entity as the unincorporated association (which incurred the tax loss), it is not entitled to a deduction for this tax loss under section 36-17.