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  • Part E Foreign source losses

    Note:

    All head companies that are required to complete another part of the Consolidated groups losses schedule 2003 are also required to complete the relevant details requested in this part.

    A foreign loss incurred by a taxpayer in an income year, in respect of a class of 'assessable foreign income', can only be used to reduce income of the same class in a later income year. The calculation of such a foreign loss has been modified by the New Business Tax System (Thin Capitalisation) Act 2001. For income years beginning on or after 1 July 2001 the calculation of foreign losses excludes debt deductions (except those that are attributable to an overseas permanent establishment). These debt deductions can be applied against Australian source income.

    These losses cannot be used to offset income in the other classes or to offset Australian source income.

    Broadly, assessable foreign income means:

    • foreign income that is included in assessable income for an income year, and
    • profits or gains of a capital nature from sources in a foreign country other than capital gains under the CGT provisions.

    The excess loss for a class of assessable foreign income may be carried forward indefinitely and used to reduce a later year's assessable foreign income for that class.

    However, losses incurred by a company before the 1990-91 income year could only be carried forward for seven years and are therefore no longer available.

    Calculation of a foreign loss

    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

    The amount of the foreign loss is calculated as follows:

    • Where no assessable foreign income was derived for a class during the income year, the foreign loss is equal to the total 'foreign income deductions' for that class.
    • Where assessable foreign income was derived for a class during the income year, the foreign loss is equal to the excess of 'foreign income deductions' for that class over the assessable foreign income.

    A foreign income deduction, in relation to a class of assessable foreign income, is any deduction that is allowed or allowable from assessable income in an income year, to the extent that the deduction relates to the assessable foreign income of that class other than:

    • certain losses relating to foreign investment funds, and
    • debt deductions as defined in section 820-40 of ITAA 1997 (except those debt deductions that are attributable to an overseas permanent establishment).

    Capital losses are not included under any of the classes of assessable foreign income, but are included under the CGT provisions.

    Debt deductions-for example, interest expense incurred in deriving assessable foreign income-can be claimed against Australian source income and are no longer quarantined to particular classes of assessable foreign income. This means that they are not included in the calculation of a foreign loss. All other deductions, including debt deductions that are attributable to an overseas permanent establishment, are quarantined to particular classes of assessable foreign income. Therefore, these deductions must be included in calculating a foreign loss.

    Classes of assessable foreign income

    Assessable foreign income is divided into four classes, which are:

    • interest income, including payments in the nature of interest

    Excluded are:

    • interest that is received in the active conduct of a trade or business-for example, interest on receivables
    • interest derived from money lending-for example, a banking business
    • interest that falls in the offshore banking income class
     
    • modified passive income is passive income other than amounts that fall within the interest class or the offshore banking income class

    Included are:

    • rent
    • royalties
    • dividends
    • annuities
    • capital gains-but not capital gains under the CGT provisions
    • amounts derived from the assignment of, for example, designs, patents or trademarks
     
    • offshore banking income-certain income derived through an offshore banking unit

    Included are:

    • interest, fees and commissions derived in respect of offshore banking transfers
    • dividends paid out of profits derived from the making of offshore banking transfers
     
    • all other foreign source income comprising amounts that do not fall within the other classes.

    Example 19

    A company in the 2002-03 income year derives modified passive income of $1,000. There are no prior year foreign source losses relating to that class of foreign income.

    During the year the company incurs the following expenses in relation to the modified passive income:

    • foreign income deductions of $1,200
    • debt deductions of $600 (that are not attributable to an overseas permanent establishment).
     

    The amount of current year foreign loss in relation to the modified passive class of income is $200. That $200 foreign loss is available to be offset against modified passive income in future years.

    The debt deductions of $600 are not included in the calculation of the current year foreign loss, and are allowed to be claimed in the current year against any other domestic income.

    Last modified: 30 Jul 2003QC 27493