Changes to foreign loss quarantining and foreign tax credit calculation rules - overview

2. New foreign losses rules

General

Previously, deductions incurred in deriving foreign income were applied against assessable foreign income of the same class (of which there were four). Where the deductions exceeded the assessable foreign income of that class, the resulting foreign loss was quarantined from domestic income, and could only be applied against future income of that class.

For income years commencing on or after 1 July 2008, foreign losses will no longer be quarantined into separate classes, nor will they be quarantined from domestic assessable income. The distinction between what is foreign and what is domestic will be removed for the purposes of applying deductions and prior-year losses. That is, deductions and prior-year losses that are applied by a taxpayer to reduce their assessable income may include both a foreign and domestic component.

Losses incurred by a controlled foreign company (CFC)

The treatment of foreign losses will be extended to losses incurred by a CFC. However, losses will continue to be quarantined in the CFC that incurred them. The four classes of losses will be removed, in effect creating one class for the purposes of applying deductions and prior-year losses.