Why changes were made
Corporate tax entities now operate under a gross-up and credit mechanism. They are now required to gross up the amount of any franked dividends received which are included in the entity's assessable income but are also allowed a franking tax offset (equal to the franking credit amount attached to the dividend).
For instance, when a corporate tax entity receives a franked dividend it is effectively receiving tax-free income as a result of the entitlement to a franking tax offset (ie This amount is equal to the franking credit attached to the dividend)
Under the previous loss provisions, a corporate tax entity that would otherwise have a current year tax loss was essentially required to use up that loss against any franked dividend income. As the franked dividend income is effectively tax-free the loss can be said to have been wasted.
Corporate groups have in the past been able to minimise the wastage of losses by separating the franked dividend income and losses between different members of the group. With the implementation of the Consolidation regime this ability to quarantine losses from franked dividend income was removed.
The objective of the no wastage of current year losses rules is to ensure that corporate tax entities do not have to use up losses against franked dividend income which is effectively freed up from tax because of the availability of the franking tax offset. These rules apply to all corporate tax entities not only consolidated groups.
Similarly, under the previous loss provisions, the general rule for prior year tax losses was that they were deductible to the maximum extent, in a later year of income, against assessable income to which they could be applied. This requirement resulted in the prior year tax loss being 'wasted' to the extent that the income is franked dividend income.
The objective of the optional use of prior year losses measure is to allow corporate tax entities to choose when and how much prior year tax losses to deduct and thus avoid wastage.