bbi vs. ato, page-10

following the whole GFC I would not be surprised to find BBI have a truck load of capital loss to claim against any gains made by selling DBCT

But that's the problem I see with an adverse finding by the ATO.

We end up with a tax liability as the deductions claimed during the years BBI was profitable are rejected (e.g. we should have paid more tax those years and the ATO will expect us to pay up with penalty interest).

Instead, the amounts we claimed as deductions and were rejected will be added to our tax base, and will reduce the profit on the sale of DBCT. But because the company is currently in an overall loss situation (not on the DBCT sale, but in general), we would not have paid any tax on the gain on the DBCT sale in any case.

It will be a carry forward loss that we can eventually right off against future profits.

This is how I look at it:

ATO rules in our favour -

means we have no immediate tax liability (or penalty interest thereon). Our capital gain from the sale of DBCT will be bigger (as deductions have been expensed and not added to cost base of DBCT). But since our overall losses are probably a lot more than this capital gain, no tax will be payable. Carry forward losses will be less than the alternative below.

ATO rules against us -

means we have an immediate tax liability (with penalty interest) that ranks ahead of other debts. Our capital gain from the sale of DBCT will be less (as deductions have not been expensed, but instead added to cost base of DBCT). But since our overall losses are probably more than this capital gain, no tax will be payable. Carry forward losses will be more than the alternative above.

In the first case we have no current tax liability, but the downside is we have less capital losses going forward. But we have to be profitable to take advantage of those losses. In the second case, we have an immediate tax liability that we have to meet somehow or other. We have more tax losses to carry forward, but that is of no immediate advantage.

Simplistically, its a bit like a company that earns $1M one year and losses $1M another year. If the profitable year comes first, then they must pay the tax on that profit to the ATO. The following year they have a loss and will pay no tax that year. They can carry forward that $1M loss to year 3.

However, if it were the other way round.... If they lost $1M the first year, they would pay no tax that year and carry the loss forward. The 2nd year they make $1M profit, but still pay no tax as the carry forward loss negates that profit. They have no losses to carry forward to year 3.

In the first case they have a real tax liability, but have $1M in losses to carry forward to year 3. In the second case, they have no tax liability and no losses to carry forward. The second case is much more preferable.