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  • 6 Net capital losses transferred from joining entities (including head company) at consolidation

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Note:

    • Do not include tax losses, film losses or foreign source losses at item 6.
    • Tax losses transferred from joining entities (including head company) at consolidation are shown at item 1, and foreign source losses at Part E-Foreign source losses.
    • Do not include net capital losses transferred after consolidation. Include these losses at item 7.
    • Net capital loss has the meaning given by sections 102-10 and 165-114 of ITAA 1997.

    This item requires information on the amount of net capital losses, transferred from joining entities, including the head company, to the head company at the date the consolidated group has been brought into existence-that is, the date specified in the notice of choice given to the Commissioner. Refer to section 703-50 of ITAA 1997.

    The relevant amount of net capital losses transferred at consolidation is to be recorded against labels A, B, or C depending on which loss transfer test, if any, has been satisfied.

    When an entity joins a consolidated group as a subsidiary member part way through the entity's income year, it calculates its taxable income or loss for the period up to the time it joins the group. Generally, any unused carry forward losses are transferred to the head company if the losses could have been used by the joining entity, assuming sufficient income or gains, in the 'trial year', which generally commences 12 months prior to joining the consolidated group and ends immediately after the joining time. In certain circumstances, the trial year may be a shorter period than 12 months. Refer to subsection 707-120(2) of ITAA 1997.

    Whether the losses could have been used by the joining entity in the trial year is determined by applying modified versions of the usual tests for deducting and applying losses.

    A joining entity is any eligible entity that joins a consolidated group. For details of who can and cannot be members of a consolidated group refer to sections 703-15 and 703-20 of ITAA 1997.

    Continuity of ownership test losses-companies only

    Show at label A those tax losses that were transferred at consolidation because the continuity of ownership and control tests were satisfied for the ownership test period, that is from the start of the year when the loss was incurred until immediately after the joining time. Refer to sections 165-12, 165-15 and 707-120 of ITAA 1997.

    The following conditions apply:

    • There must be persons who beneficially owned (between them) shares carrying (between them) the right to exercise more than 50% of the voting power in the company, and rights to receive more than 50% of the company's dividends and rights to receive more than 50% of the company's capital distributions at all times during the ownership test period. Refer to sections 165-150 to 165-160 of ITAA 1997.
    • It is reasonable to assume that there are persons (none of them companies or trustees) who between them have beneficial interests (directly, or indirectly through one or more interposed entities) in shares in the company carrying (between them) a majority of the voting power, and rights to dividend and capital distributions at all times during the ownership test period. Refer to sections 165-150 to 165-160 of ITAA 1997.
    • Where tax losses are claimed in an income year ending after 21 September 1999, the company must meet the 'same share and interest' requirement, except where the 'saving' rule applies. Refer to section 165-165 and subsection 165-12(7) of ITAA 1997.
    • A modified version of the above rules can apply to a listed public company and its 100% subsidiaries. Refer to Division 166 of ITAA 1997.

    Anti-avoidance provisions are found at Subdivisions 175-A and 175-B of ITAA 1997.

    Same business test losses-companies only

    Show at label B those tax losses that were transferred at consolidation where the continuity of ownership or control tests were failed but the joining company satisfied the same business test.

    The following table shows how the same business test applies for companies joining a consolidated group. Refer to subsections 707-120(1) and (3) and subsections 707-125(1) to (3) of ITAA 1997.

    Same business transfer tests for companies

    In these circumstances:

    Test the joining entity's business at these points:

    1. The loss was made by the joining entity for an income year starting after 30 June 1999

     

    • just before the end of the income year in which the loss was made
    • the income year in which the joining entity first fails the ownership or control tests if that income year started before the trial year, and
    • the trial year.
     
    1. The loss was made by the joining entity for an income year starting before 1 July 1999
     
    • Just before the ownership or control tests were first failed, and
    • the trial year.
     

    Where a loss is transferred as a result of satisfying the same business test, it may only be transferred again if-in addition to satisfying the usual transfer tests-the entity transferring the loss carried on the same business at these times:

    • just before the end of the income year in which the loss was previously transferred to it, and
    • during the trial year.

    Refer to subsection 707-135(2) of ITAA 1997. Under the same business test the company must carry on the same business at all the times indicated in the preceding table-that is, throughout the trial year and year of ownership change (if applicable) and other relevant time. The test is not satisfied if at any time the company did not carry on the same business as it did at another required time or it derives assessable income from:

    • a business of a kind that it did not carry on before the relevant time, or
    • a transaction of a kind that it did not enter into in the course of its business operations before the relevant time.

    'Same' means 'identical' and not merely 'similar'. The term 'same business' is to be read as referring to the same business, in the sense of the identical business. However, the term does not mean identical in all respects. A company may expand or contract its activities without necessarily ceasing to carry on the same business. The organic growth of a business does not necessarily cause the business to fail the same business test provided the business retains its identity. However, if through a process of evolution a business changes its essential character, the entity would fail the test. Application of the same business test is a question of fact and is usually determined by a process of weighing up various relevant factors.

    For more information refer to sections 165-13 and 165-210 of ITAA 1997 and Taxation Ruling TR 1999/9.

    Other losses-trusts only

    Show at label C those net capital losses that were transferred at consolidation by a trust.

    Example 7

    A consolidated group comes into existence on 1 July 2002. During the 2002-03 income year the following net capital losses are transferred to the head company from joining entities which pass the loss transfer tests indicated.

    Joining entity

    Joining time

    Net capital loss amount
    $

    A Company

    1.7.2002

    900

    B Company

    1.7.2002

    1,800

    C Company

    9.4.2003

    3,200

    X Fixed trust

    1.7.2002

    2,400

    Y non-fixed trust

    1.7.2002

    1,100

    Transfer test passed

    Joining entity

    Continuity of ownership

    Same business

    A Company

    N

    Y

    B Company

    Y

    -

    C Company

    Y

    -

    X Fixed trust

    -

    -

    Y non-fixed trust

    -

    -

    The head company completes part A, item 6 on the schedule as follows:

    Label

    Code

    Amount ($)

    Continuity of ownership test losses

    A

    1,800

    Same business test losses

    B

    900

    Other losses

    C

    3,500

    As C Company's continuity of ownership tax losses were transferred after consolidation, the amount transferred is recorded at item 7, label D.

    End of example
    Last modified: 30 Jul 2003QC 27493