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Foreign losses are no longer quarantined from domestic assessable income, or from assessable foreign income of a different class. Resident taxpayers are no longer required to make an election to deduct domestic tax losses against assessable foreign income. As a result, in utilising deductions, no distinction is made in respect of the source of the assessable income, whether foreign or domestic; that is, a taxpayer combines both foreign and domestic deductions. Where the combined deductions exceed assessable income and net exempt income, the excess is a tax loss and can potentially be deducted from assessable income in a later income year.
The changes to the foreign loss provisions apply from the first income year starting on or after 1 July 2008 (the commencement year).
Prior year overall foreign losses that existed at the beginning of the commencement year are subject to transitional rules. Generally, overall foreign losses in respect of the four former classes of assessable foreign income for each earlier income year were grouped together and converted into a tax loss. The converted loss is known as the foreign loss component of a tax loss. Utilisation of the foreign loss component of a tax loss is restricted for the first four years - the commencement year and the three subsequent income years. After this transitional period, any remaining undeducted tax loss will be subject to the ordinary loss utilisation rules.
See Subdivisions 770-A Transitional foreign losses (common rules) and 770-B Transitional foreign losses (special rules for consolidated groups) of the IT(TP)A.
1 Foreign loss component of a tax loss
Foreign loss component of tax losses deducted
Write at K the foreign loss component of tax losses deducted in this income year.
Include the amount shown at K, with other tax losses deducted (if any), at RTax losses deducted item 7 on your Company tax return 2012.
Foreign loss component of tax losses carried forward
Write at L the foreign loss component of tax losses carried forward to later income years.
The amount shown at L should equal the amount at J less the amount at K.
Include the amount shown at L, with other tax losses carried forward (if any), at U item 13Tax losses carried forward to later income years on your Company tax return 2012.
Foreign loss component of tax loss transferred from joining entities
Write at M the foreign loss component of tax losses transferred from joining entities during the income year.
A head company that seeks to deduct a transferred tax loss with a foreign loss component that was transferred to the head company during its 2012 income year must take into account any amounts deducted by the joining entity, including in the joining entity's non-membership period.
2 Controlled foreign company losses
A CFC is no longer required to quarantine revenue losses into separate classes of notional assessable income. However, CFC losses continue to be quarantined in the CFC that incurred them.
The amounts shown at N, O and P are the totals of the entity's share of losses incurred by CFCs. The entity's share of a loss of a CFC is calculated by applying its attribution percentage in the CFC to the loss of the CFC.
Current Year CFC Losses
Write at N the total amount of the entity's share of current CFC losses for a statutory accounting period that ends within the 2011-12 income year.
CFC losses deducted
Write at O the total of the entity's share of CFC losses deducted for a statutory accounting period that ends within the 2011-12 income year.
CFC losses carried forward
Write at P the total amount of the entity's share of CFC losses, if any, that is available to be carried forward to statutory accounting periods that end in later income years.
Part F Tax losses reconciliation for consolidated groups
This part requires you to reconcile the company's tax losses brought forward from the prior income year with those tax losses carried forward to later income years.
Note: Do not include net capital losses or film losses at this item.
Balance of tax losses brought forward from prior year
Write at A the undeducted amount of tax losses incurred by the company and brought forward to the 2011-12 income year under section 36-17 of the ITAA 1997. The balance of losses brought forward from prior income years includes undeducted tax losses remaining within a bundle of losses; that is, tax losses transferred in a prior income year under Subdivision 707-A (including those with a nil available fraction).
Tax losses transferred from joining entities under Subdivision 707-A
Write at C the amount of tax losses transferred from joining entities to the head company during the 2011-12 income year.
Note: Tax losses transferred from joining entities in prior years are included at A Balance of tax losses brought forward from the prior income year.
Transferred tax losses with a nil available fraction that have been applied
The Tax Laws Amendment (2009 Measures No. 4) Act 2009 amended the income tax law to ensure losses transferred to the head company of a consolidated group or a multiple entry consolidated group by a joining entity that is insolvent at the joining time can be used by the head company in certain circumstances, with effect from 1 July 2002. The head company can apply transferred losses with a nil available fraction to reduce a net forgiven amount under the commercial debt forgiveness rules, reduce a capital allowance adjusted under the limited recourse debt rules, and reduce the capital gain that arises under CGT event L5 when the joining entity subsequently leaves the group.
See section 707-415 of the ITAA 1997.
Write at L the amount of tax losses with a nil available fraction that have been applied to reduce:
- a net forgiven amount under the commercial debt forgiveness rules
- a capital allowance adjusted under the limited recourse debt rules, or
- the capital gain that arises under CGT event L5 when the joining entity subsequently leaves the group.
Net forgiven amount of debt
Tax losses brought forward and losses transferred from joining entities are reduced by any commercial debt forgiveness amounts - see Division 245 of the ITAA 1997. If a commercial debt owed by the company is forgiven during the income year, apply in the following order the net amount of debts forgiven to reduce the company's deductible revenue losses, net capital losses, certain undeducted revenue or capital expenditure, and the cost bases of CGT assets.
The Tax Laws Amendment (2009 Measures No. 4) Act 2009 amended the income tax law so that a transferred loss with a nil available fraction can be used by the head company of a consolidated group to reduce a net forgiven amount under the commercial debt forgiveness rules, with effect from 1 July 2002 - see section 707-415 of the ITAA 1997.
Write at D the total net forgiven amount applied to reduce tax losses (if any) incurred in years of income before the forgiveness year of income or to reduce tax losses transferred under Subdivision 707-A from joining entities in the current year.
Tax loss incurred (if any) during current income year
Write at E the company's tax loss for the year, disregarding net exempt income and excess franking offsets.
There is a limit on the total of the amount you can deduct in the income year for gifts and contributions - see section 26-55 of the ITAA 1997. Deductions for gifts or contributions allowable under Division 30 of the ITAA 1997 cannot produce or increase a tax loss.
Tax loss amount from conversion of excess franking offsets
If the company has excess franking offsets, it must convert the excess franking offsets into an amount of tax loss to carry forward to later income years. You convert the amount of excess franking offsets into a tax loss by dividing the excess franking offsets amount by the corporate tax rate.
Write at F the amount of this tax loss.
Net exempt income
Write at G the amount of net exempt income to be taken into account in calculating the company's tax loss or carried forward tax loss.
You are required to first deduct a prior year tax loss from any net exempt income in the later income year.
If the entity has net exempt income and assessable income exceeds allowable deductions (other than the tax loss), the prior year tax loss has to be first applied against net exempt income. Only then can the entity deduct so much of the undeducted amount of the prior year tax loss (if any remains) that it chooses, subject to certain limitations - see subsections 36-17(3) and (5) of the ITAA 1997.
Conversely, if the entity has allowable deductions (other than the tax loss) that exceed assessable income, the excess deductions must be applied against net exempt income first, and then the prior year tax loss must be applied against any remaining net exempt income - see subsection 36-17(4) of the ITAA 1997.
Note: Exclude that part of net exempt income for which an amount of a tax loss could not be applied due to a deduction limit. A deduction limit can apply to the foreign loss component of a tax loss and to a transferred tax loss whose utilisation is subject to an available fraction of less than 1.
Tax losses cancelled or forgone
Write at H the amount of tax losses cancelled under section 719-325 of the ITAA 1997, or any losses that will not be deducted in any later income year.
A company cannot deduct a tax loss unless:
- it has the same owners and the same control throughout the period from the start of the loss year to the end of the income year, or
- it satisfies the same business test by carrying on the same business, entering into no new kinds of transactions and conducting no new kinds of business - see Subdivision 165-A of the ITAA 1997.
Tax losses deducted
Write at I tax losses (including convertible foreign losses) deducted during the income year under section 36-17 of the ITAA 1997.
Tax losses transferred out under subdivision 170-A
Write at J the amount of tax losses transferred out by the company to group companies under Subdivision 170-A of the ITAA 1997.
Total tax losses carried forward to later income years
Write at K the total of tax losses carried forward to later income years.
If you do not lodge the schedule with the tax return, you must sign and date the schedule.
Last modified: 30 May 2012QC 25834