Company tax losses: deducting losses from net exempt income

Where a company has tax losses that it incurred prior to deriving net exempt income, can it deduct those tax losses under Division 165 of the Income Tax Assessment Act 1997 (ITAA 1997) if it satisfies the same business test?

Yes. To the extent that the tax losses are not required to be deducted from the net exempt income in accordance with subsections 36-17(3) and (4) of the ITAA 1997.

The taxpayer, a company, incurs a tax loss (the tax loss) of $1000 in the year of income ended 30 June 2004. It has no earlier undeducted tax losses.

During the year of income ended 30 June 2005, the taxpayer underwent a complete change of ownership. The taxpayer derived $200 net exempt income and had a $300 excess of total assessable income over total deductions. The taxpayer, under paragraph 36-17(3)(b) of the ITAA 1997, chooses not to deduct any of the tax loss against that excess.

In the year of income ended 30 June 2006, the taxpayer's total assessable income exceeds its total deductions by $2000. The taxpayer, under subsection 36(17)(2) of the ITAA 1997, chooses to deduct the whole of the tax loss (that is, $1000) incurred in the year of income ended 30 June 2004 against that excess.

The taxpayer satisfies the same business test under section 165-13 in respect of the year of income ended 30 June 2006.

In respect of the income year ended 30 June 2005, the taxpayer may, in accordance with paragraph 36-17(3)(b) of the ITAA 1997, choose to deduct a nil amount of the tax loss against its excess of total assessable income over its deductions.

However, the taxpayer, under paragraph 36-17(3)(a) of the ITAA 1997, is required to deduct $200 of the tax loss from its net exempt income.

Therefore in accordance with subsection 36-17(8) of the ITAA 1997, the taxpayer can only choose to deduct a maximum of $800 of the tax loss in the year of income ended 30 June 2006.