Company tax loss: whether a tax loss which is disallowed following an injection of income is cancelled

Where assessable income or a capital gain has been injected into a company because of an available tax loss, and the Commissioner disallows a deduction for some or all of the tax loss (the excluded loss) pursuant to section 175-10 of the Income Tax Assessment Act 1997 ( ITAA 1997), is the excluded loss cancelled?

No. Section 175-10 of the ITAA 1997 allows the Commissioner to disallow the deduction of the excluded loss for an income year if the requisite conditions are satisfied. However, the excluded loss may be deducted in a future income year, subject to the satisfaction of the special rules applying to company losses, including Division 175 of the ITAA 1997 (section 36-25 of the ITAA 1997).

Company A has a tax loss available from an earlier income year (the loss year) which it is now seeking to deduct.

Company A derives an amount of assessable income in the income year that it would not have derived if the tax loss had not been available for deduction.

The Commissioner has determined that the 'continuing shareholders' (as defined in subsection 175-10(3) of the ITAA 1997) of Company A do not benefit from the derivation of the injected amount to an extent that is fair and reasonable having regard to their respective rights and interests in Company A.

Company A does not satisfy the same business test in respect of the income year.

The deduction of the tax loss has been disallowed for the income year pursuant to section 175-10 of the ITAA 1997.

Section 175-5 of the ITAA 1997 states: 175-5(1) This Subdivision [175-A] sets out cases where the Commissioner may disallow some or all of a *tax loss (or of part of a tax loss) ( the excluded loss ) as a deduction in calculating a company's taxable income of an income year after the *loss year. 175-5(2) However, the Commissioner cannot disallow the *excluded loss if the company: (a) fails to meet a condition in section 165-12 (which is about maintaining the same owners) in respect of the *loss year or the income year; but (b) meets the condition in section 165-13 (which is about the company satisfying the same business test) in respect of the income year.

The legislative intent of section 175-5 of the ITAA 1997 does not suggest that a tax loss that is disallowed (wholly or partly) as a deduction in an income year is cancelled, and unavailable for deduction in a future income year.

Section 175-10 of the ITAA 1997, which provides for the first case where a company derives assessable income or makes a capital gain because of an available tax loss, is likewise focused on the circumstances of an income year, and does not extend to cancel the excluded loss. The tax loss or part thereof can be deducted in a future income year, subject to the satisfaction of the special rules applying to company losses, including Division 175 of the ITAA 1997(section 36-25 of the ITAA 1997). Note: the same interpretation applies to section 80DA of the Income Tax Assessment Act 1936, which was the predecessor to Subdivision 175-A of the ITAA 1997.