You may claim a notional allowable deduction for a CFC's previous years' losses. Do this separately for each class of income. In determining the loss for a particular class of notional assessable income, only the notional allowable deductions that relate to that particular class and were derived in that period are taken into account. If the notional allowable deductions are more than the notional assessable income, the difference is set off against the sometimes exempt income gain of that class for the period. The amount that remains is the CFC's loss for that class for the period.
How is a sometimes exempt income gain worked out?
The sometimes exempt income gain for each class of income is the amount of sometimes exempt income that is more than the sometimes exempt deductions. The sometimes exempt income gain reduces a CFC's loss in a class of income. Losses in the current period are reduced before losses carried forward from a previous period.
Conditions before a loss is allowed
You are allowed a notional deduction for a previous year's loss only if the CFC was a CFC when the loss was incurred and at the end of each period until the loss is claimed.
In working out the previous years' losses of the CFC, you must assume that you were always an attributable taxpayer who was required to work out attributable income. Therefore, it is possible to carry forward a loss from a period when you were not an attributable taxpayer.
You cannot take into account any loss incurred in a statutory accounting period that commenced before 1 July 1983.
Residency requirement for losses
A notional deduction is not allowable for a previous year loss if a CFC does not satisfy the residency requirement in the period when the loss was incurred. The general rule is that a CFC resident in a broad-exemption listed country can only claim a notional deduction for a previous year loss if:
- the loss was incurred in a statutory accounting period commencing on or after 1 July 1997 and the CFC was a resident of a broad-exemption listed country in that period, or
- the loss was incurred in a statutory accounting period commencing before 1 July 1997 and the CFC was a resident of a listed country in that period.
The general rule for a CFC resident in a non-broad-exemption listed country is that the CFC can only claim a notional deduction for a previous year loss if:
- the loss was incurred in a statutory accounting period commencing on or after 1 July 1997 and the CFC was a resident of a non-broad-exemption listed country in that period, or
- the loss was incurred in a statutory accounting period commencing before 1 July 1997 and the CFC was a resident of an unlisted country in that period.
Modifications to the general rule deal with cases where a company:
- remains a resident of the same country
- is treated as changing residence from a listed country to an unlisted country or vice versa as a result of changes to the list(s) of countries or political developments - for example, as a result of the dissolution of a country.
In these cases, the losses incurred by a CFC in an earlier period are not denied solely because the listing status of a CFC's country of residence changes. The following table summarises the availability of losses incurred in statutory accounting periods commencing before 1 July 1997.
Scenario |
CFC's current country of residence |
Availability of losses for statutory accounting periods commencing after 1 July 1997 |
|---|---|---|
Losses incurred by a listed country CFC in a statutory accounting period commencing before 1 July 1997. |
broad-exemption listed country |
Allowable (see note) |
Losses incurred by a listed country CFC in a statutory accounting period commencing before 1 July 1997. |
non-broad-exemption listed country |
Generally not allowable |
Losses incurred by an unlisted country CFC in a statutory accounting period commencing before 1 July 1997. |
broad-exemption listed country |
Generally not allowable |
Losses incurred by an unlisted country CFC in a statutory accounting period commencing before 1 July 1997. |
non-broad-exemption listed country |
Allowable (see note) |
Losses incurred by a listed country CFC in a statutory accounting period commencing before 1 July 1997. The CFC subsequently changes residence to another listed country in a statutory accounting period commencing before 1 July 1997. |
broad-exemption listed country |
Allowable (see note) |
Losses incurred by a listed country CFC in a statutory accounting period commencing before 1 July 1997. The CFC subsequently changes residence to another listed country in a statutory accounting period commencing before 1 July 1997. |
non-broad-exemption listed country |
Generally not allowable |
Losses incurred by an unlisted country CFC in a statutory accounting period commencing before 1 July 1997. The CFC subsequently changes residence to a listed country in a statutory accounting period commencing before 1 July 1997. |
broad-exemption listed country |
Not allowable because the losses would have been denied previously. |
Losses incurred by an unlisted country CFC in a statutory accounting period commencing before 1 July 1997. The CFC subsequently changes residence to a listed country in a statutory accounting period commencing before 1 July 1997. |
non-broad-exemption listed country |
Not allowable because the losses would have been denied previously. |
Losses incurred by a listed country CFC in a statutory accounting period commencing before 1 July 1997. The CFC subsequently changes residence to an unlisted country in a statutory accounting period commencing before 1 July 1997. |
broad-exemption listed country |
Not allowable because the losses would have been denied previously. |
Losses incurred by a listed country CFC in a statutory accounting period commencing before 1 July 1997. The CFC subsequently changes residence to an unlisted country in a statutory accounting period commencing before 1 July 1997. |
non-broad-exemption listed country |
Not allowable because the losses would have been denied previously. |
Losses incurred by a broad-exemption listed country CFC in a statutory accounting period commencing after 1 July 1997. |
broad-exemption listed country |
Allowable (see note) |
Losses incurred by a broad-exemption listed country CFC in a statutory accounting period commencing after 1 July 1997. |
non-broad-exemption listed country |
Generally not allowable |
Losses incurred by a non-broad-exemption listed country CFC in a statutory accounting period commencing after 1 July 1997. |
broad-exemption listed country |
Generally not allowable |
Losses incurred by a non-broad-exemption listed country CFC in a statutory accounting period commencing after 1 July 1997. |
non-broad-exemption listed country |
Allowable (see note) |
Note: The losses are not allowable if they were denied in an earlier statutory accounting period.
Losses confined to the CFC
Where a CFC has incurred a loss of a class of income, you cannot transfer the loss to reduce the notional assessable income of another CFC or your own assessable income. The loss is locked into the CFC.