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  • 3 Tax losses utilised

    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 net capital losses, foreign source losses or film losses utilised at item 3.
    • Net capital losses utilised are shown at item 8, and foreign source losses utilised at Part E-Foreign source losses.
    • For the definition of a tax loss refer to section 995-1 of ITAA 1997.

    This item requires information on the amount of tax losses, excluding film losses and foreign source losses, utilised. A head company utilises a tax loss to the extent it is deducted from an amount of the head company's assessable income or net exempt income.

    Subject to various rules, an earlier year tax loss is deducted in a later income year-to the extent that it has not already been utilised-as shown by the following formulae:

    • If the head company has no net exempt income and has an excess of assessable income over total deductions-other than tax losses-deduct the tax loss from the excess assessable income. Refer to subsection 36-15(2) of ITAA 1997.
    • If the head company has net exempt income and an excess of assessable income over total deductions-other than tax losses-first deduct the tax loss from the net exempt income, with any remaining amount of tax loss then being deducted from the excess assessable income. Refer to subsection 36-15(3) of ITAA 1997.
    • If the head company has net exempt income and an excess of total deductions-other than tax losses-over assessable income, deduct the excess deductions from the net exempt income and then deduct the tax loss from any net exempt income that remains. Refer to subsection 36-15(4) of ITAA 1997.

    A head company's net exempt income is calculated in accordance with section 36-20 of ITAA 1997.

    A head company may be entitled to utilise carry forward losses broadly comprising:

    • losses generated by the consolidated group-group losses, and/ or
    • transferred losses that were generated by an entity before it became a member of 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.

    Transferred losses

    The operation of the continuity of ownership test is modified by Subdivision 707-B of ITAA 1997. Firstly, the loss year is modified so that it starts from when the loss was transferred to the head company. Secondly, in determining whether a head company can use a loss transferred to it from a company as a result of passing the continuity of ownership and control tests, changes in ownership of a loss company prior to it joining the consolidated group are recognised. Refer to section 707-210 of ITAA 1997.

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

    Concessional tax losses are used after group tax losses and are effectively used before other transferred tax losses. Refer to subsection 707-350(2) of the Income Tax (Transitional Provisions) Act 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 net capital loss. 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. However, for utilisation purposes, losses in one bundle may be subject to the available fraction for another loss bundle if certain conditions are satisfied (refer to Increasing the available fraction-value donor concession).

    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 initial 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 produced the publication Consolidation and market valuation.

    The available fraction may be increased if the value donor concession applies. 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.

    Tax losses must first be deducted against exempt income. A special rule provides that the head company, in working out its actual taxable income, can offset its transferred tax losses against assessable income provided they have been first utilised against a fraction of its total exempt income. Refer to section 707-340 of ITAA 1997.

    Note: Example 13, applying the available fraction using the three-step process is included at the end of this part.

    Increasing the available fraction-value donor concession

    A loss entity (the 'real loss-maker'), in calculating its available fraction, may add to its modified market value the modified market value of another company (the 'value donor'). Certain losses from the value donor are also able to be notionally transferred to the real loss-maker. This enables those losses to be utilised using the available fraction for the real loss-maker. Only company losses may benefit from the concession to donate value and losses.

    The conditions for adding an amount of modified market value from the value donor to the real loss-maker are as follows:

    • Both the real loss-maker and the value donor join the group when it first consolidates before 1 July 2004.
    • The real loss-maker has a 'test loss'-a tax loss or net capital loss that is not a concessional loss.
    • The real loss-maker could have transferred its test loss to the value donor under Subdivision 170-A or 170-B of ITAA 1997 for an income year-generally the trial year.
    • The value donor-assuming it had made the test loss-could have transferred it to the head company under Subdivision 707-A.
    • The head company chooses to increase the real loss-maker's modified market value by a portion of the value donor's modified market value.

    Refer to subsections 707-325(1) and (2) of the Income Tax (Transitional Provisions) Act 1997.

    The increase in the modified market value of the real loss-maker is worked out using a formula. Refer to subsections 707-325(3) and (4) of the Income Tax (Transitional Provisions) Act 1997.

    The conditions for donating losses from the value donor (referred to here as the 'loss donor') to the real loss-maker are as follows:

    • The loss donor has also donated an amount of modified market value to the real loss-maker (in certain circumstances the amount can be nil).
    • The loss to be donated is a tax loss or a net capital loss that is not a concessional loss.
    • The loss was transferred under Subdivision 707-A from the loss donor to the head company at the time when the consolidated group came into existence.
    • The loss donor could have transferred the loss to the real loss-maker, and any other value donor to the real loss-maker, under Subdivision 170-A or 170-B of ITAA 1997 for an income year-generally the trial year.
    • The real loss-maker-and any other value donor of the real loss-maker-could have transferred the loss to the head company under Subdivision 707-A.
    • The head company chooses that the loss be included in the real loss-maker's bundle.

    Refer to subsections 707-327(1), (2) and (3) of the Income Tax (Transitional Provisions) Act 1997.

    Where a loss is donated, the group's use of the loss is governed by the real loss-maker's available fraction.

    A loss can only be taken into account under either the value donor rule or the loss donor rule but not both. Refer to subsection 707-327(6) of the Income Tax (Transitional Provisions) Act 1997.

    An irrevocable choice to donate losses must be made by the head company by the day it lodges its income tax return for the first income year for which it uses transferred losses by the available fraction method.

    When applying Subdivisions 170-A or 170-B for the purposes of the value donor and loss donor rules, the income year is modified and certain conditions apply. Refer to section 707-328 of the Income Tax (Transitional Provisions) Act 1997.

    Note: Example 14, applying the value donor and loss donor concessions is included at the end of this part.

    Group

    Show at label G the amount of group tax losses utilised. Group tax losses are those tax losses that have been generated by the consolidated group. Group tax losses are, effectively, utilised before transferred tax losses.

    Show transferred tax losses utilised at either label H or I, as appropriate.

    Concessional

    A transferred tax loss, in a particular loss bundle, may be used in accordance with the concessional method if the loss meets certain conditions and the head company has chosen to use the concessional method for all losses in the bundle that meet these conditions. The conditions are that the tax loss:

    • was originally made outside the consolidated group by a company-the real loss-maker-for an income year ending on or before 21 September 1999
    • is transferred from the real loss-maker to the head company of the group when the group first consolidates before 1 July 2004
    • is transferred because the continuity of ownership and control tests were passed, and
    • has not been previously transferred to a group.

    Refer to subsection 707-350(1) of the Income Tax (Transitional Provisions) Act 1997.

    Concessional losses may be utilised by the head company over three years, subject to the general loss recoupment tests as modified. Refer to subsection 707-350(3) of the Income Tax (Transitional Provisions) Act 1997. This limit on utilisation replaces that which would otherwise apply under the available fraction method.

    Tax losses claimed on a concessional basis are effectively utilised before other transferred tax losses. Group tax losses must be utilised before concessional losses.

    Show at label H the amount of concessional tax losses utilised.

    Other transferred

    Show at label I the amount of other transferred tax losses utilised. Other transferred tax losses are tax losses that have been made outside the consolidated group and transferred into the group from an entity when it joined the group. Transferred tax losses utilised on a concessional basis are to be shown at label H.

    Total

    Show at label R the total of tax losses utilised at labels G to I.

    Transfer the amount at label R to the corresponding label on your tax return.

    Example 3

    ABC consolidated group comes into existence on 1 July 2002. On that date, tax losses of $1,500 are transferred to the head company from joining entities which satisfy the continuity of ownership and control transfer tests. No other losses are transferred to the head company. ABC group determines that $600 of the tax losses transferred satisfy the conditions for use of the concessional method and the head company makes a valid choice to apply this method for all the eligible losses. The balance of the losses transferred ($900) are to be utilised applying the available fraction method.

    For the 2002-03 income year, ABC group has assessable income of $1,950 and deductions of $250. The head company satisfies the modified loss recoupment tests in respect of all the transferred tax losses. ABC group has calculated that it is able to use $30 of the transferred tax losses applying the available fraction method.

    For the 2002-03 income year, ABC group determines its taxable income as follows:

    Assessable income

    Amount ($)

    Net capital gain

    0

    Other assessable income

    1,950

    Total

    1,950

     

    Deductions

    Amount ($)

    Deductions

    250

    Concessional tax losses

    200

    Transferred tax losses

    30

    Total

    480

    ABC group's taxable income is $1,470 (that is $1,950 − $480).

    Note:

    • Tax losses transferred of $200-one-third of the total amount transferred-can be utilised applying the concessional method in the first income year ending after the initial transfer time.
    • Tax losses of $400 applying the concessional method can be carried forward to the 2003-04 income year. Tax losses of $870 ($900 -$30) applying the available fraction method can be carried forward to the 2003-04 income year.

    For the 2002-03 income year, the head company completes part A, item 3 on the schedule as follows:

    Label

    Code

    Amount ($)

    Group

    G

    0

    Concessional

    H

    200

    Other transferred

    I

    30

    Total

    R

    230

     

    End of example
    Last modified: 30 Jul 2003QC 27493