Part E Foreign source losses
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. Therefore, 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). The requirement to complete item 1 of Part E Foreign source losses on the schedule, applies only to entities with an early substituted accounting period in their 2010 income year. Complete item 1 of Part E Foreign source losses only if the entity has an early substituted accounting period in its 2010 income year. For all other entities item 1 of Part E Foreign source losses applied only last year. If you completed item 1 in the 2009 schedule, do not complete it this year.
Prior year overall foreign losses that exist at the beginning of the commencement year will be subject to transitional rules. Generally, overall foreign losses in respect of the four former classes of assessable foreign income for each earlier income year will be grouped together and converted into a tax loss. The converted loss will be known as the foreign loss component of a tax loss. Utilisation of the foreign loss component of a tax loss will be 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 Calculate the starting total for your convertible foreign losses - Complete this item only if the entity uses an early substituted accounting period
What is a convertible foreign loss?
Taxpayers are required to convert any overall foreign loss of a particular class of assessable foreign income that has not yet been utilised (under former section 160AFD of the ITAA 1936) into a tax loss.
A taxpayer is not required to satisfy the general loss recoupment tests when converting an overall foreign loss of a particular class into a tax loss. Rather, a taxpayer will need to satisfy these tests when they seek to deduct the loss from assessable income in the commencement year or a subsequent year of income.
A taxpayer will have a convertible foreign loss for an earlier income year if:
- they have an unrecouped overall foreign loss in respect of a class of assessable income (within the meaning of former section 160AFD of the ITAA 1936) for that earlier income year; and
- the overall foreign loss was made in one of the most recent 10 income years ending before the commencement year. For example, for an entity with an early December balance date, this means overall foreign losses that were incurred for the 1999-2000 to 2008-09 income years; and
- an overall foreign loss remains after being reduced by certain amounts.
See section 770-5 of the IT(TP)A.
Show at A, B, C and D the sum of the amount of unrecouped overall foreign loss for each of the four classes of assessable foreign income made in any of the most recent 10 income years ending before the commencement year. Exclude losses of controlled foreign companies. See item 3 of part E.
The loss year in which a head company is taken to have made an overall foreign loss, by virtue of subsection 707-140(1), is not relevant in determining whether the loss was made in the most recent 10 income years ending before the commencement year. It is the income year in which the joining entity actually incurred the loss that is relevant. See subsection 770-80(2) of the IT(TP)A.
Calculating a convertible foreign loss
Each overall foreign loss made in any of the 10 income years ending before the commencement year, in respect of a class of assessable foreign income, is reduced as follows:
Step 1:
If the relevant class of assessable foreign income is the 'all other assessable income' class, reduce the unrecouped overall foreign loss for that class to the extent (if any) that the loss is attributable to losses or outgoings incurred in gaining or producing income of a kind that would be the company's non-assessable non-exempt income, if it were gained or produced in the commencement year.
Show at E the loss amount attributable to non assessable non exempt income.
Subtract E from D and show the result at F.
Show the total of A, B, C and F at G.
Step 2:
Step 2 requires a taxpayer with an overall foreign loss that was incurred more than seven income years, but not more than 10 income years before the end of the commencement year, to halve the loss remaining after step 1.
Include at H 50% of the losses at G that were incurred for the 1999-2000 to 2001-02 income years.
The amount remaining when the losses at H are subtracted from the losses at G is the amount of the convertible foreign losses for all of the relevant earlier income years. This is also known as the starting total.
Where an entity's starting total is $10,000 or less, no special deductibility rules apply. Further, where an entity has a starting total of more than $10,000, the entity may choose to reduce one or more of its convertible foreign losses so that the starting total equals $10,000. In that case too, no special deductibility rules would apply, but the excess of the starting total over $10,000 would never be deductible.
See section 770-15 of the IT(TP)A.
Where the starting total is $10,000 or less, the entity can deduct the entire convertible foreign loss at the end of the commencement year (provided it has sufficient assessable income and the general loss recoupment tests are satisfied).
If the entity chooses to reduce one or more of their convertible foreign losses such that their starting total equals $10,000, show at I the amount by which the convertible foreign losses are reduced.
The amount at J equals the total at G less any amounts at H and I.
Example 18
At the start of the commencement year a consolidated group has the following amounts of group and transferred foreign source losses relating to each of the four classes of assessable foreign income that are available to be carried forward to this income year.
Foreign loss related to class of assessable foreign income |
||||
Income year joining company or group incurred the loss |
Interest |
Modified passive |
Offshore banking |
|
Joining Co. A |
1995 |
3,400 |
||
Joining Co. B |
2005 |
1,200 |
||
Joining Co. C |
2000 |
3,100 |
||
Group loss |
2007 |
5,400 |
8,500 |
|
Note: The head company and the joining companies all have an early balancing 31 December substituted accounting period.
Overall foreign losses for the preceding 10 income years
The head company must convert these overall foreign losses into tax losses. However, only overall foreign losses made in any of the most recent 10 income years ending before the commencement year are able to be converted.
Company A became a subsidiary member of the head company's consolidated group on 1 January 2003 (the joining time). At the joining time the overall foreign loss of $3,400 relating to interest income (which had been incurred by Company A in the 1995 income year) was transferred under Subdivision 707-A to the head company from Company A.
The head company will not have regard to the overall foreign loss transferred from Company A as it was made (disregarding the operation of section 707-140) in an income year ending more than 10 years before the commencement year.
That is, even though the head company is taken to have made the loss in the 2004 income year (the year in which the loss was transferred to it), it is the income year in which Company A actually incurred the loss (the 1995 income year ) that is relevant in determining whether the loss was made in the most recent 10 income years ending before the commencement year.
Overall foreign loss older than seven years, but not older than 10 years
Company C also became a subsidiary member of the head company's consolidated group on 1 January 2003 (the joining time). At the joining time the overall foreign loss of $3,100 relating to modified passive income (which had been incurred by Company C in the 2000 income year) was transferred to the head company from Company C.
As Company C's loss was actually incurred in an income year other than the most recent seven income years ending before the commencement year, half of the loss amount ($1,550) is included at H.
Entity chooses to reduce one or more of the losses so that the starting total equals $10,000
The head company chooses to reduce one or more of its convertible foreign losses such that the starting total equals $10,000.
The entity writes $6,650 at I and $10,000 at J.
The head company completes item 1 part E on the schedule as follows:
2 Foreign loss component of a tax loss
How to deduct a converted foreign loss
The sum of the convertible foreign losses (converted into a tax loss) for each earlier income year is the starting total for all of those losses taken together (the loss parcel).
An entity that does not apply the $10,000 limit will be subject to special rules on deductibility. The special rules only apply to the component of a tax loss that comprises the convertible foreign loss (the foreign loss component).
The entity divides the starting total for the loss parcel into five equal portions (see section 770-30 of the IT(TP)A). In the commencement year, the entity can use a maximum of one portion of the starting total (subject to the general loss recoupment tests). In the next three income years ending after the commencement year the entity can use (subject to general loss rules) a maximum of one portion plus any remaining amount of a portion that it was unable to deduct in a prior income year, for example because it had insufficient assessable income. In the fourth income year ending after the commencement year (and subsequent income years), the entity can deduct any remaining foreign loss component without restriction (subject to the general loss recoupment tests).
An entity that has a non-membership period before it joins a consolidated group can deduct its converted foreign loss up to the deduction limit (subject to the usual loss recoupment tests) in that non-membership period. This is because a non-membership period is treated as an income year under subsection 701-30(3). If a non-membership period ends before the end of the head company's income year, the head company must reduce its deduction limit by the amount deducted by the joining entity in that non-membership period. The head company, in this situation, will only be able to deduct the remaining portion (if any) at the end of its income year. See section 770-100 of the IT(TP)A.
Available fraction
A foreign loss component is not subject to the available fraction method of utilisation while it is subject to the deduction limit in section 770-30 of the IT(TP)A. This means that the available fraction does not apply to the foreign loss component of a tax loss in the first 4 years after commencement, instead, the deduction limit in section 770-30 applies.
Also, the head company applies the available fraction for each bundle to income or gains that have been reduced by deductions for all foreign loss components (both group and transferred). See section 770-105 of the IT(TP)A.
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 2010
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 2010.
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 2010 income year must take into account any amounts deducted by the joining entity, including in the joining entity's non-membership period.
Example 19
On 1 January 2010 Company A joins the consolidated group of Company H, the head company, part way through Company H's income year. Company A has convertible foreign losses with a starting total of $20,000. Company A is allowed to deduct up to one-fifth of the starting total (1/5 x $20,000 = $4,000) in its commencement year (1 July 2008 to 30 June 2009), which is the limit under subsection 770-30(1) of the IT(TP)A. In the first income year ending after the commencement year (the non-membership period from 1 July 2009 to 31 December 2009), Company A's deduction limit was $4,000. Due to insufficient income Company A could only deduct $3,000.
The remaining tax loss of $13,000 transfers to Company H on 1 January 2010.
Company H writes $13,000 at M.
When Company H seeks to deduct the tax loss in its 2010 income year (which ends on 30 June 2010) it must take into account the amounts deducted by Company A in respect of the commencement year as well as its non-membership period.
As the 2010 income year is Company H's first income year ending after the commencement year, Company H's deduction limit in respect of the transferred tax loss is calculated as follows:
($20,000 x 2/5) - ($4,000 + $3,000) = $1,000 |
3 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.
Convertible CFC loss
Under the transitional rules a CFC is required to convert losses from the four classes of notional assessable income for each earlier statutory accounting period that have not yet been taken into account into one loss bundle.
An eligible CFC will have a convertible CFC loss for an earlier statutory accounting period if:
- it has an unrecouped loss for the earlier period in relation to notional assessable income of a particular class (under current section 426 of the ITAA 1936)
- the loss was made in one of the 10 most recent statutory accounting periods ending before the commencement period (which is the first statutory accounting period starting on or after 1 July 2008), and
- a loss remains after being reduced by certain amounts.
See section 770-165 of the IT(TP)A.
Convertible CFC losses
Write at N the total of the entity's share of convertible CFC losses for the earlier statutory accounting periods.
CFC losses deducted
Write at O the total of the entity's share of CFC losses (including convertible CFC losses), if any, that have been claimed as notional allowable deductions in calculating the CFC's attributable income for a statutory accounting period that ends within the 2009-10 income year.
CFC losses carried forward
Write at P the total amount of the entity's share of undeducted convertible 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 2009-10 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).
Amount of convertible foreign losses
Write at B any overall foreign losses converted to tax losses in the current year. For more information see Part E Foreign source losses.
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 2009-10 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 section707-415 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 Schedule 2C to the ITAA 1936. If a commercial debt owed by the company is forgiven during the income year apply 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, in that order.
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.
Note: 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.