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21 Mar 2006
Appeal Status

LAQC losses must be attributed

2006 case note - losses incurred by a loss attributing qualifying company must be attributed - LAQC, loss offset provisions, group loss provisions.

New Zealand Ostrich Export Company Limited v The Commissioner of Inland Revenue

Income Tax Act 1994, sections IG 2, HG 16


All losses incurred by an LAQC must be attributed. The net loss for attribution cannot be partly reduced by an offset against the income of a profit company under the loss offset provisions.


This was an appeal by the Taxpayer against a decision of the TRA reported as Case X14 (2005) 22 NZTC 12,194. The Taxpayer was an LAQC. It incurred a tax loss of $1,200,526.09 for the year ended 31 March 2002.

The Taxpayer elected to offset $44,426 of the loss for the 2002 year to other companies within the group under the group loss provisions. The remaining $1,156,199.09 was attributed to its shareholders in terms of section HG 16.

The Commissioner contended the loss offset rules applicable to LAQCs override the general provision applying to offset of losses between members of a group of companies. The result was that he required all losses to be attributed under the LAQC rules. The TRA upheld the assessment.


The appellant contended that the term "net loss" in section HG 16 referred to the tax loss of $1,200,526.09 included "a net loss after reduction in that loss by the application of section IG 2". The Commissioner contended that the entire amount of that sum is the "net loss" referred to in section HG 16(1).

The Court noted that the term "net loss" has been defined in a very simple way to be the difference between available deductible expenses and gross income. If the meaning of "net loss" in section HG 16(1) is expanded to allow for reduction of that loss by an offset election under section IG 2(2)(i) then that does more that just qualify the definition, it changes the meaning of it completely.

The Court concluded by observing that sections HG 10 and IG 2 and HG 16 can co-exist. The correct interpretation of section HG 16 is that it has the effect of passing through the losses of the LAQC to the shareholders where losses accrue after the election. If there is no election, then sections HG 10 and IG 2 can be used.