## Part 1:

Determine Current Year Tax Loss

A current year tax loss arises in an income year in which the taxpayer's allowable deductions exceed assessable income and that excess is also greater than any net exempt income for the year (for the purposes of this calculation prior year tax losses are ignored).

The meaning of 'current year tax loss' and 'loss year' have been modified for a corporate tax entity that has an amount of excess franking offsets. A corporate tax entity will have an amount of excess franking offsets to the extent that its franking tax offsets exceed its income tax. Where this is the case, the amount of that excess is converted to an equivalent amount of tax loss by dividing it by the corporate tax rate. This converted tax loss is then aggregated with any current year tax loss and the aggregated amount becomes the tax loss for the income year.

Note: The term 'excess franking offset' carries the same meaning as 'excess franking rebate' as it appears in the company tax return instruction guide.

If a corporate tax entity has an amount of net exempt income, this amount will be subtracted from the aggregate amount.

Therefore, a corporate tax entity should firstly utilise the following method statement to determine whether it has a current year tax loss:

 Step 1: Work out current year tax loss (if any) under the general provisions disregarding net exempt income (NEI). Step 2: Convert the excess franking offsets into a tax loss using the following step-by-step approach: (a) Calculate franking tax offsets: add the amount of franking tax offsets from receiving franked distributions (including those received indirectly), add the amount of venture capital tax offsets, and subtract any amount of franking tax offsets that are refundable tax offsets (corporate tax entities will generally not be entitled to refundable franking tax offsets). The sum of this calculation will be the entity's total franking offsets that are available for consideration in the calculation of the entity's excess franking offsets. (b) Calculate the amount of income tax: Subtract allowable deductions from assessable income and then apply the corporate tax rate (the assessable income includes the gross up amount of franked dividends). Reduce the amount of income tax by all tax offsets, (this includes foreign tax credits), with the exception of the following tax offsets: - franking tax offsets calculated under (a), - offsets subject to tax offset carry forward rules, - offsets subject to refundable tax offset rules, and - offsets subject to franking deficit tax offset rules. That is, don't reduce the income tax by these tax offsets but all other tax offsets. . (c) Determine if there is an amount of excess franking offsets: Where the amount of franking tax offsets exceeds the amount of income tax, calculated at (b), then this amount of the excess franking offsets is equal to the difference. (d) Convert the excess franking offsets into a loss: To convert this excess into a tax loss you need to divide the excess franking offsets by the corporate tax rate. Step 3: Total the loss amounts from Step 1 and Step 2; (that is the amount of the loss, if any, under the general provisions plus the tax loss from the converted excess franking offsets). Step 4: Reduce the amount of loss determined at Step 3 by the entity's net exempt income (NEI).

If the result of applying the method statement is a positive amount, the corporate tax entity is taken to have a current year tax loss equal to that positive amount. The corporate tax entity will be able to carry forward its current year tax loss and any prior year tax loss to the next income year.

Where the result is nil or a negative amount, the company does not have a current year tax loss and it will need to determine whether it can choose to deduct a prior year tax loss. Refer to Part 2 of this Guide.

Example 1:

In 2003-2004 income year Company A has:

Assessable Income (AI) of \$100 (franked dividend of \$70 and franking credits of \$30)

\$200 allowable deductions (DED)

\$100 prior year tax losses (P/Y)

no net exempt income

Using the Guide we need to go firstly to Part 1: Determine Current Year Tax Loss:

Step 1:

Tax loss disregarding NEI

\$100 (\$200 DED - \$100 AI)

Step 2:

(a) Franking Tax Offsets (FTO)

\$ 30

(b) Income Tax (IT)

\$ Nil (due to tax loss)

(c) Excess Franking Offsets (EFO)

\$ 30 (FTO exceeds IT)

(Show amount at Item 8 label H - Excess franking rebate of the company tax return)

(d) EFO/CR tax rate

\$100 (\$30/30%)

Step 3:

Step 1 + Step 2

\$200

Step 4:

Step 3 - NEI

\$200

The amount of \$200 yielded by using the method statement is a positive amount, therefore the entity is taken to have a \$200 current year tax loss. The entity does not need to go to Part 2 of the Guide.

The tax position of Company A for its 2003-2004 income year is:

\$200 current year tax loss (include amount at Item 10 label U - Tax losses carried forward to later income years of the company tax return)

\$100 prior year tax losses (include amount at Item 10 label U - Tax losses carried forward to later income years of the company tax return)

Nil Tax Payable