This Ruling, released on Wed 12.6.2012, provides guidance on the nexus test for hypothetical losses relevant to the application of s 230-30(2) of the ITAA 1997. It explains how that subsection applies to a gain made from a financial arrangement. Where this provision applies, a gain is to some extent exempt income or non-assessable non-exempt income (NANE income). The Ruling also explains how subss 230-30(2) and 230 30(3) apply to a loss made by a taxpayer, or would have made, from a financial arrangement.
The Ruling says s 230-30(3) provides that a loss made from a financial arrangement is not an allowable deduction, to the extent it is made in gaining or producing exempt income or NANE income, unless that loss satisfies the description in s 230-15(3). Subsection 230-30(2) provides that, despite section 230-15, a gain will be exempt income or NANE income to the extent that, if it had been a loss instead (a “hypothetical loss”), it would have been made in gaining or producing such income.
The ATO says a loss is made in gaining or producing exempt or NANE income if the loss is incidental and relevant to the exempt income or NANE income-producing activity of the taxpayer. Whether a loss has a sufficient nexus to the gaining or producing of exempt income or NANE income is a question of fact and circumstances.
The Ruling was previously issued as Draft TR 2011/D7.
DATE OF EFFECT: The Ruling applies both before and after its date of issue.
[LTN 112, 13/6]
Extract from Income Tax Assessment Act 1997
SECT 230-15 Gains are assessable and losses deductible
Gains
230-15 (1) Your assessable income includes a gain you make from a * financial arrangement.
Note: This Division does not apply to gains that are subject to exceptions under Subdivision 230-H.
Losses
230-15 (2) You can deduct a loss you make from a * financial arrangement, but only to the extent that:
(a) you make it in gaining or producing your assessable income; or
(b) you necessarily make it in carrying on a * business for the purpose of gaining or producing your assessable income.
Note: This Division does not apply to losses that are subject to exceptions under Subdivision 230-H.
230-15 (3) You can also deduct a loss you make from a * financial arrangement if:
(a) you are an * Australian entity; and
(b) you make the loss in deriving income from a foreign source; and
(c) the income is * non-assessable non-exempt income under section 23AI, 23AJ or 23AK of the Income Tax Assessment Act 1936 ; and
(d) the loss is, in whole or in part, a cost in relation to a * debt interest you issue that is covered by paragraph 820-40(1)(a).
You can deduct the loss only to the extent to which it is a cost in relation to a * debt interest you issue that is covered by paragraph 820-40(1)(a).
Note: This Division does not apply to losses that are subject to exceptions under Subdivision 230-H.
230-15 (4) If the * financial arrangement is a * debt interest, the loss is not prevented from being deductible for an income year under subsection (2) merely because of either or both of the following:
(a) one or more of the * financial benefits that are taken into account in working out the amount of the loss are * contingent on the economic performance (whether past, current or future) of:
(i) you or a part of your activities; or
(ii) a * connected entity of yours or a part of the activities of a connected entity of yours;
(b) one or more of the financial benefits that are taken into account in working out the amount of the loss secure a permanent or enduring benefit for you or a connected entity of yours.
230-15 (4A) A * dividend on a * debt interest is a loss you can deduct to the extent to which it would have been a deductible loss under subsection (2) if:
(a) the payment of the amount of the dividend were the incurring of a liability to pay the same amount as interest; and
(b) that interest were incurred in respect of the finance raised by you and in respect of which the dividend was paid or provided; and
(c) the debt interest retained its character as a debt interest for the purposes of subsection (4).
230-15 (5) Subject to subsection (6), subsection (4) does not apply to the loss to the extent to which the annually compounded internal rate of return on the * debt interest exceeds the * benchmark rate of return for the debt interest increased by 150 basis points.
230-15 (6) If:
(a) regulations made for the purposes of subsection 25– 85(6) provide that a specified number of basis points is to apply for the purposes of applying subsection 25– 85(5) in particular circumstances; and
(b) those circumstances exist in relation to the * debt interest;
subsection (5) applies as if the reference in that subsection to 150 basis points were a reference to the number of basis points specified in the regulations.
Division does not affect foreign residence rules
230-15 (7) Nothing in this Division affects the operation of the provisions of Division 6 that provide for the significance of foreign residence for the assessability of ordinary and statutory income.
Note 1: Gains that you make under this Division may be ordinary or statutory income for the purposes of Division 6.
Note 2: For the effect of a change of residence during an income year, see sections 230-485 and 230-490.
SECTION 230-30 Treatment of gains and losses related to exempt income and non-assessable non-exempt income
230-30(1) Despite section 230-15, a gain that you make from a *financial arrangement:
(a) to the extent that it reflects an amount that would be treated, or would reasonably expected to be treated, as *exempt income under a provision of this Act if this Division were disregarded — is exempt income; and
(b) to the extent that it reflects an amount that would be treated or would reasonably expected to be treated, as *non-assesable non-exempt income under a provision of this Act if this Division were disregarded — is not assessable income and is not exempt income.
230-30(2) Despite section 230-15, a gain that you make from a *financial arrangement:
(a) to the extent that, if it had been a loss, you would have made it in gaining or producing *exempt income — is exempt income; and
(b) to the extent to which, if it had been a loss, you would have made it in gaining or producing *non-assessable non-exempt income — is not assessable income and is not exempt income.
230-30(3) A loss you make from a *financial arrangement is not allowable as a deduction to you under any provision of this Act (other than subsection 230-15(3)) to the extent that you make it in gaining or producing your:
(a) *exempt income; or