Improvements to the company loss recoupment rules

In the 2011-12 Budget, the government announced improvements to the operation of the company loss recoupment rules by making it easier for companies to satisfy the continuity of ownership test in certain circumstances, with effect from the 2011-12 income year.

A company can deduct prior-year losses if it satisfies the continuity of ownership test or the same business test. This measure will modify the continuity of ownership test so that ownership does not need to be traced through certain superannuation entities. It will also remove technical deficiencies in the modified rules for widely held entities where:

• an entity is interposed between certain stakeholders and the loss company in certain circumstances
• an interposed entity demerges
• an interposed foreign entity issues bearer depository receipts
• a corporate change arising from the issue of new shares happens.

This measure will also ensure that all membership interests held in an entity are treated as a single asset for the purpose of applying the low-value asset exclusions under the loss integrity rules.

Administrative treatment

The Australian Taxation Office (ATO) will accept tax returns as lodged during the period leading up to the proposed law change being passed by parliament and enacted. For past-year assessments, reviews will not occur until the outcome of the proposed amendment is known.

Following the date the proposed new law is enacted, taxpayers will need to review their positions back to the 2011-12 income year. Taxpayers who:

• claimed a deduction for tax losses or apply net capital losses which accord with the changes do not need to do anything more
• underclaimed losses can seek an amendment - and if a reduction in liability results, interest on overpayment will be paid
• anticipated the law change, but find that this does not accord with the enacted law will need to seek amendments - no tax shortfall penalties will be applied and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change; in addition, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend assessments within a reasonable timeframe after enactment.

More information

For more information, refer to: Budget Measures 2011-12 (1.2MB) page 28. Consultation Paper - Improvements to the Company Loss Recoupment Rules released by Treasury on 14 July 2011.