Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES  

PART 3-5 - CORPORATE TAXPAYERS AND CORPORATE DISTRIBUTIONS  

Division 175 - Use of a company ' s tax losses or deductions to avoid income tax  

Subdivision 175-C - Tax benefits from unused bad debt deductions  

SECTION 175-85   First case: income or capital gain injected into company because of available bad debt  

175-85(1)    
The Commissioner may disallow some or all of the deduction if the company would not have had some or all (the injected amount ) of its assessable income or *capital gains for the income year if:

(a) the debt had not been incurred; and

(b) the debt (or the relevant part of the debt) had not been written off (or able to be written off) as bad.

175-85(2)    
However, the Commissioner cannot disallow any of the deduction if the *continuing shareholders will benefit from the company having the injected amount to an extent that the Commissioner thinks fair and reasonable having regard to their respective rights and interests in the company.

Note:

Section 175-100 allows the Commissioner to disallow some or all of a deduction of an insolvent company.

175-85(3)    
The continuing shareholders are:

(a) all of the persons who had *more than 50% of the voting power in the company throughout the *first continuity period and the *second continuity period; and

(b) all of the persons who had rights to *more than 50% of the company ' s dividends throughout the *first continuity period and the *second continuity period; and

(c) all of the persons who had rights to *more than 50% of the company ' s capital distributions throughout the *first continuity period and the *second continuity period.

To find out who they were, apply whichever tests are applied in order to determine whether the company can deduct the debt (or the relevant part of the debt) in the first place.

Note 1:

See section 165-123 (about the company maintaining the same owners).

Note 2:

Division 167 has special rules for working out rights to voting power, dividends and capital distributions in a company whose shares do not all carry the same rights to those matters.