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  • 2 Group/ transferred foreign source losses utilised-excludes losses of CFCs

    Attention

    Warning:

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

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    Show at labels E, F, G and H the amounts of group and transferred foreign source losses, if any, relating to each of the four classes of income that were utilised.

    A head company utilises a foreign source loss in respect of a class of assessable foreign income to the extent that the loss is taken into account in reducing the head company's assessable foreign income of that class.

    Group foreign source losses are those foreign source losses that have been generated by the consolidated group. Group foreign source losses are effectively utilised before transferred foreign source losses.

    Transferred foreign source losses are foreign source losses that have been made outside the consolidated group and transferred into the group from an entity when it joins the group.

    Before utilising a group loss or a transferred loss, a head company is required to pass the continuity of ownership and control tests or the same business test.

    For more information on the conditions applying to the continuity of ownership test, see the information on Part A - Tax losses and net capital losses consolidated, item 1. For more information on the same business test, refer to sections 165-13 and 165-210 of ITAA 1997 and Taxation Ruling TR 1999/9. To find out how to obtain a copy of the ruling, see the inside back cover.

    Transferred losses

    Foreign source losses generated by a consolidated group-group losses-are effectively utilised before transferred foreign source losses. Refer to paragraph 707-310(3)(b) of ITAA 1997.

    All losses transferred to a head company for the first time from the entity that actually made them constitute a bundle of losses. Losses within the bundle will be categorised by the 'sort' of loss such as a tax loss or a foreign source loss in respect of a class of assessable foreign income. Refer to section 707-315 of ITAA 1997.

    Available fraction

    A single available fraction is worked out for each loss bundle. The available fraction limits the annual rate at which the bundle's losses may be recouped by the head company. Where losses are transferred for the first time, the available fraction is calculated like this:

    A ÷ B

    Where:

    A is modified market value of the joining loss entity at the transfer time

    B is adjusted market value of the head company at the initial transfer time

    The modified market value of a joining entity is the amount that would be the market value of the entity at the joining time if:

    • the entity has no losses and the balance of its franking account is nil
    • the subsidiary members of the group at the time are separate entities and not divisions or parts of the head company of the group
    • the entity's market value did not include an amount attributable (directly or indirectly) to a membership interest in a member of the group (other than the entity) that is a corporate tax entity or an entity that transferred losses to the head company, and
    • a trust (other than a corporate tax entity or a trust with losses) contributes to the joining entity's market value only to the extent attributable to fixed entitlements (at joining time) to income or capital of the trust that is not attributable (directly or indirectly) to membership interests in another member of the group that is a corporate tax entity or a trust with losses.

    Refer to section 707-325 of ITAA 1997.

    An increase in the value of the loss entity is excluded from the entity's modified market value if the increase results from either of these events:

    • an injection of capital into the loss entity, its associate or, if the loss entity is a trust, an associate of the trustee, or
    • a non-arm's length transaction that involved the loss entity, its associate or, if the loss entity is a trust, an associate of the trustee.

    The rules apply to events that occur in the four years before the loss entity joins the group; however, they do not apply to events that occurred before 9 December 2000. Refer to subsections 707-325(2) and (4) of ITAA 1997 and section 707-329 of the Income Tax (Transitional Provisions) Act 1997.

    The head company's adjusted market value at the initial transfer time is the amount that would be the market value at that time if:

    • the head company did not have a loss of any sort for an income year ending before that time, and
    • the balance of the head company's franking account was nil at that time.

    Refer to subsection 707-320(1) of ITAA 1997. The value for the head company is worked out on the basis that subsidiary members of the consolidated group are part of the head company.

    Note: The Commissioner of Taxation will have a statutory obligation to ensure compliance with the market valuation requirements of the consolidation regime and to form a view as to whether valuations undertaken are accurate. To assist taxpayers meet their obligations, the ATO has prepared the publication Consolidation and market valuation.

    The available fraction is adjusted if certain events happen, for example, the consolidated group acquires a new loss entity or the sum of the available fractions in the group exceeds 1. Refer to subsection 707-320(2) of ITAA 1997.

    The use of transferred losses is apportioned if their available fraction applied for only part of the income year or when the available fraction changes during the income year. Refer to section 707-335 of ITAA 1997.

    Apply the available fraction using a three-step process as follows:

    1. Work out the amount of each category of the group's income or gains as specified in column 2 of the table in subsection 707-310(3) of ITAA 1997. This is the group's total income or gains for each category less relevant deductions including group losses and concessional losses (but not transferred losses whose use is limited by their available fraction).
    2. Multiply each category amount by the bundle's available fraction. The result is taken to be the head company's only income or gains for that category.
    3. On the basis of the step 2 assumption, work out a notional taxable income for the head company.

    This process enables the head company to determine the amount of transferred losses of each sort it can use from the loss bundle to determine its actual taxable income.

    Note:

    • Example 13, applying the available fraction using the three-step process is included at the end of part A.
    • The available fraction for a foreign source loss is unaffected by the value donor rules. This means that where a value donor donates value to a loss company-the real loss-maker-the available fraction for a real loss-maker's foreign source loss is the fraction that would have applied had value not been donated. Likewise, the available fraction for a value donor's foreign loss is what it would have been if the value donor had not donated some or all of its value to the real loss-maker. Therefore, a single loss bundle may have two relevant available fractions-one that applies to the bundles' foreign source losses and one that applies to its tax and net capital losses.
    Last modified: 30 Jul 2003QC 27493