House of Representatives

New Business Tax System (Consolidation) Bill (No. 1) 2002

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 9 - Transitional concessions for losses

Outline of chapter

9.1 This chapter explains the transitional concessions available for transferred losses. These concessions will be included in Subdivision 707-C of the Income Tax (Transitional Provisions) Act 1997.

Context of reform

9.2 The available fraction method outlined in Chapter 8 sets a limit on the utilisation of losses transferred to a group by reference to the contribution to group income expected to be made by the entity that transferred the losses. A concession that increases the available fraction is provided in recognition that, under the existing group loss transfer rules, an entity can use its losses to shelter not just its own income but also the income of another member of the same wholly-owned group. Since the group loss transfer rules will be repealed as a result of the introduction of the consolidation regime, this concession is only available to groups that consolidate during the transitional period (i.e. 1 July 2002 to 30 June 2004).

9.3 The available fraction method departs from Recommendation 15.3 of A Tax System Redesigned . In recognition of this departure, an additional concessional method for the use of transferred losses has been developed to apply to certain losses transferred to a group that consolidates during the transitional period.

Summary of new law

9.4 A loss entity joining a consolidated group may increase its modified market value (for the purpose of calculating its available fraction) by a portion of the modified market value of another entity to which it could have transferred losses under the existing group loss transfer rules. This is a transitional measure that only applies if both entities joined the group when it formed during the transitional period.

9.5 Further, in respect of company COT losses transferred to a group when it consolidates during the transitional period, and that were made in an income year ending on or before 21 September 1999, concessional treatment can be chosen. That is, instead of their utilisation being determined by reference to an available fraction, they may be used over 3 years.

Comparison of key features of new law and current law
New law Current law
A loss entity, in calculating its available fraction, may add to its modified market value the modified market value of another company to which it could have transferred losses under Division 170 of the ITAA 1997. It may also add certain losses from the other company to its own loss bundle. The rule in the new law reflects the fact that under the current law an entity may shelter its losses not just against its own income, but also against the income of another member of the same wholly-owned company group.
Concessional losses can be used by a head company over 3 years, subject to it having sufficient income against which those losses can be offset (and satisfying the relevant loss recoupment tests). The rate of loss usage is dictated entirely by the loss entitys income or ability to transfer the loss to another member of the same wholly-owned company group (and satisfying the relevant loss recoupment tests).

Detailed explanation of new law

9.6 The transitional concessions only apply to losses transferred by companies to the head company of a group when it first forms during the transitional period.

9.7 The first concession complements the available fraction method for using transferred losses. Broadly it allows the available fraction for a loss company to be increased where that company has losses that it could have transferred to one or more other group companies under the existing loss transfer rules in Division 170 of the ITAA 1997. The fraction is increased by one company (the value donor) donating value to the loss company (the real loss-maker). The value donor may also donate certain of its own losses to the real loss-maker so they can be used by the group in accordance with the real loss-makers increased available fraction.

9.8 The second concession is an alternative to the available fraction method. It allows certain company COT losses to be used over 3 years.

Available fraction method: donating value

9.9 A real loss-maker that joins a consolidated group before 1 July 2004 and transfers one or more tax or net capital losses (test losses) at that time may work out its modified market value as if it included some or all of the modified market value of the value donor. The value donors modified market value is reduced by the amount of its value that has been used for the real loss-maker. The value donated represents income or gains that under the existing loss transfer rules could be sheltered by the real loss-makers losses.

9.10 Only company losses may benefit from the concession as companies are the only entities that can currently transfer losses.

9.11 The conditions are:

both the real loss-maker and the value donor join the group when it first consolidates before 1 July 2004 [Schedule 2, item 2, paragraphs 707-325(1)(b) and (c)] ;
the real loss-maker has a test loss;
the real loss-maker could have transferred its test loss to the value donor under Subdivision 170-A or 170-B of the 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; and
the head company chooses to increase the real loss-makers modified market value by a portion of the value donors modified market value.

9.12 The left side of Diagram 9.1 shows a single real loss-maker (RLM) with 3 value donors. The right side depicts the conditions to be satisfied in respect of each value donor.

Diagram 9.1

a single real loss-maker with 3 value donors

Condition: the real loss-maker has a test loss

9.13 The real loss-makers loss bundle must include at least one test loss. A test loss is a tax loss or a net capital loss that is not a concessional loss . The term test loss is not used in the law but is used in this explanatory memorandum as a tag to describe these types of losses. A concessional loss is one the head company has chosen to use in accordance with the second concession discussed in paragraphs 9.56 to 9.69. The value donor concession is not relevant to concessional losses because their use is not limited by their available fraction. Further, the value donor concession does not apply to foreign losses because they cannot be transferred under Division 170. [Schedule 2, item 2, paragraph 707-325(1)(d)]

Condition: the test loss could be transferred to the value donor

9.14 The real loss-maker must have been able to transfer the test loss to the value donor under Subdivision 170-A or 170-B for an income year which will generally be the trial year. [Schedule 2, item 2, paragraph 707-325(1)(f) and subsection 707-325(2)]

9.15 Some modifications are needed to ensure that concepts in Division 170 interact appropriately with this rule. They are discussed in paragraphs 9.44 to 9.54.

Condition: the value donor could transfer the test loss to the head company

9.16 This condition ensures that the value donor could have used the test loss if it had made it instead of the real loss-maker. That is, the value donor must have been able to transfer the test loss to the head company under Subdivision 707-A, assuming the value donor made the loss for the same income year the real loss-maker did. [Schedule 2, item 2, paragraph 707-325(1)(e)]

9.17 This condition replaces the conditions in subsections 170-40(2) and 170-140(2) of the ITAA 1997 which require the transferee (referred to in those provisions as the income company or the gain company ) to have not been prevented from deducting or applying the transferred loss. The condition ensures that the value donor tests its ability to use or apply the test loss by reference to the general loss rules as modified for consolidation loss transfer purposes.

Condition: the head company chooses (to donate value)

9.18 The head company chooses to increase the modified market value of a real loss-maker by a percentage (not greater than 100%) of the value donors modified market value. The values are worked out as at the joining time (i.e. the initial transfer time). The choice 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 applying the available fraction method. The choice cannot be amended or revoked. [Schedule 2, item 2, subsections 707-325(5) and (6)]

The amount of the increase

9.19 The percentage of value chosen is multiplied by the proportion of the real loss-makers total transferred losses (other than concessional and foreign losses) that meet the conditions for the concession in relation to the value donor. In working out the proportion, ignore any losses donated to the real loss-maker under the rules discussed in paragraphs 9.29 to 9.43.

9.20 The result is the amount by which the real loss-makers modified market value is increased for that value donor. The amount of the increase will be less than the value chosen if the real loss-maker has any losses that are not transferable to the value donor. [Schedule 2, item 2, subsections 707-325(3) and (4)]

9.21 A real loss-maker may have more than one value donor, either in relation to the same test loss or in relation to different test losses in its bundle. Separate increases are worked out for the real loss-maker in respect of each of its value donors. While a real loss-maker may receive a number of donations of value, it cannot in turn donate any value it has received. Any value received by a real loss-maker is solely for the purpose of working out an available fraction for its own loss bundle. [Schedule 2, item 2, subsection 707-325(1)]

9.22 On the other hand, a value donor may have more than one real loss-maker to which it donates value. As discussed in paragraph 9.18, the percentage of value chosen in respect of a single real loss-maker cannot exceed 100% [Schedule 2, item 2, subsection 707-325(5)] . Also, the total actual increases to modified market value for all of the value donors real loss-makers cannot exceed the value donors modified market value [Schedule 2, item 2, subsection 707-325(7)] . This means that value chosen in respect of a particular real loss-maker but not able to be actually donated to it (because the real loss-maker had non-transferable losses) is available for donation to the value donors other real loss-makers.

What is the value donors modified market value?

9.23 The value donors modified market value is worked out by applying the same rules that a joining entity uses as part of its available fraction calculation. This includes the rules that reduce modified market value in respect of certain pre-consolidation events (i.e. capital injections or non-arms length transactions). This ensures these integrity rules are not avoided by use of the value donor concession. [Schedule 1, item 2, section 707-325]

9.24 The modified market value used by the value donor in working out its own available fraction is generally its modified market value less the total value actually used in working out an available fraction for real loss-makers to which it donated value. This rule applies if the value donor has tax losses or net capital losses remaining in its bundle after the value and loss donation process is completed. If the value donor has foreign losses, then it uses the whole of its modified market value in working out an available fraction for them (see paragraphs 9.25 to 9.28). [Schedule 2, item 2, subsections 707-325(8) and (9)]

Foreign losses

9.25 The available fraction for a foreign loss in either the real loss-makers bundle or the value donors bundle is unaffected by the value donor rules. This is because foreign losses cannot be transferred under Division 170 of the ITAA 1997 and the value donor and loss donor concessions therefore do not apply. [Schedule 2, item 2, subsection 707-325(9)]

9.26 This means the available fraction for a real loss-makers foreign loss is the fraction that would have applied had value not been donated. Likewise, the available fraction for a value donors 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.

9.27 Therefore, a single loss bundle may have 2 relevant available fractions - one that applies to the bundles tax and net capital losses and one that applies to its foreign losses. Both fractions will need to be updated if any of the adjustment events discussed in Table 8.1 occur.

9.28 The available fraction adjustments take account of the proportion that a groups fractions bear to each other (e.g. the adjustment in item 5 in Table 8.1 where a groups fractions total more than one). For that reason, where either the real loss-maker or the value donor transfer foreign losses to the group, the group must keep 2 completely separate sets of fractions - one that reflects the application of the value donor rules and one that ignores their application.

Available fraction method: donating losses

9.29 If a real loss-makers modified market is increased under the value donor rules discussed in paragraphs 9.9 to 9.24, the head company may also treat one or more of the value donors losses as being included in the real loss-makers bundle. The losses donated represent losses that under the existing loss transfer rules could be used to shelter the real loss-makers income (i.e. value). This is essentially the reverse of donating value.

9.30 The conditions are:

the loss donor has also donated value to the real loss-maker [Schedule 2, item 2, paragraph 707-327(1)(a)] ;
the loss to be donated is a movable loss;
the loss donor could have transferred the loss to the real loss-maker under Subdivision 170-A or 170-B of the ITAA 1997 for an income year (generally the trial year):

-
also the loss donor could have transferred the loss under either Subdivision to any other value donor to the real loss-maker;

the real loss-maker could have transferred the loss to the head company under Subdivision 707-A:

-
also any other value donor of the real loss-maker could have transferred the loss to the head company; and

the head company chooses that the loss be included in the real loss-makers bundle.

9.31 The left side of Diagram 9.2 shows a single real loss-maker (RLM) with 3 value/loss donors. The right side depicts the conditions to be satisfied in respect of each loss donor, the real loss-maker and any other value donor to the real loss-maker.

Diagram 9.2

a single real loss-maker (RLM) with 3 value/loss donors

Condition: the loss must be a movable loss

9.32 The loss must have been transferred by the loss donor to the head company when the loss donor joined the group. The loss must be a tax loss or a net capital loss that is not a concessional loss. [Schedule 2, item 2, paragraphs 707-327(1)(b) and (c)]

9.33 A loss donor may have been a real loss-maker under a separate application of these rules. The test loss in respect of that other application of the rules cannot be later moved or donated. That is, it is not a movable loss. [Schedule 2, item 2, subsection 707-327(6)]

Condition: the loss could be transferred to the real loss-maker

9.34 The loss donor must have been able to transfer the loss to the real loss-maker under Subdivision 170-A or 170-B of the ITAA 1997 for an income year which will generally be the trial year. [Schedule 2, item 2, paragraph 707-327(1)(e) and subsections 707-327(2) and (3)]

9.35 Also the loss donor must have been able to transfer the loss under Subdivision 170-A or 170-B to each of the real loss-makers other value donors (if any). This ensures that all losses donated are only effectively sheltering income of entities to which those losses could have been transferred under the existing loss transfer rules. [Schedule 2, item 2, subsection 707-327(3)]

9.36 Some modifications are needed to ensure that concepts in Division 170 interact appropriately with these rules. They are discussed in paragraphs 9.44 to 9.54.

Condition: the real loss-maker could have transferred the loss to the head company

9.37 The real loss-maker must have been able to transfer the loss under Division 707-A to the head company. This ensures that the real loss-maker tests whether it could use or apply the loss by applying the general loss rules as modified for consolidation loss transfer purposes. [Schedule 2, item 2, paragraph 707-327(1)(d) and subsection 707-327(2)]

9.38 Also, each of the real loss-makers other value donors must have been able to transfer the loss to the head company. This, together with the rule discussed in paragraph 9.35, ensures that the loss donor has the same relationship with each of the other value donors to the real loss-maker that the loss donor has with the real loss-maker. [Schedule 2, item 2, paragraph 707-327(1)(d) and subsection 707-327(2)]

Condition: the head company chooses (to donate losses)

9.39 The head company chooses that the (loss donors) loss be included in the real loss-makers bundle. The loss is taken to be included at the initial transfer time, but only for the purpose of working out the amount of the loss that can be used by the group. For these purposes, the loss is also treated as not remaining in the loss donors own loss bundle. [Schedule 2, item 2, subsection 707-327(4)]

9.40 This means the groups use of the loss is governed by the real loss-makers (increased) available fraction (instead of the loss donors). It means the donated loss cannot be used by the real loss-maker as a test loss. It also does not affect the application of the COT or other recoupment tests in respect of the groups use of the loss.

9.41 The real loss-makers (increased) available fraction may change during the income year. Therefore, the loss is taken to be in the real loss-makers bundle for the purpose of applying the apportionment rules which are discussed in paragraphs 8.37 to 8.46. However, the inclusion of the value donors loss does not affect how the real loss-maker calculates it loss holding period for the purpose of those apportionment rules. [Schedule 1, item 2, section 707-335; Schedule 2, item 2, subsection 707-327(4)]

9.42 While any part of the loss is capable of utilisation or reduction, it is treated as remaining in the real loss-makers bundle, even if the real loss-makers own losses have been fully utilised. (Usually a loss bundle ceases to exist when all the real loss-makers losses have been used or reduced.) [Schedule 1, item 2, section 707-315; Schedule 2, item 2, subsection 707-327(4)]

9.43 The 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. The choice cannot be revoked. [Schedule 2, item 2, subsection 707-327(5)]

Value and loss donor rules: modifications to Division 170

9.44 For value to be donated, the real loss-maker must have been able to transfer its test loss to the value donor under Subdivision 170-A or 170-B for an income year which is usually the trial year. Similarly, for a loss to be donated, the loss donor (which must also be a value donor) must have been able to transfer its movable loss to the real loss-maker under either Subdivision for an income year which is usually the trial year.

9.45 In determining whether a loss could have been transferred, only some sections of Subdivisions 170-A and 170-B are relevant. These are mainly the sections which concern the conditions for transfer (i.e. sections 170-30, 170-35 and 170-40 for tax losses and sections 170-130, 170-135 and 170-140 for net capital losses). Other sections, for example those that concern the agreement to transfer, are not relevant.

Assumptions

9.46 In determining whether those losses can be transferred, the conditions in Subdivision 170-A or 170-B are applied as though:

neither the real loss-maker nor the relevant donor had become a subsidiary member of the group before, at or after the initial transfer time [Schedule 2, item 2, subsection 707-328(3)]:

-
this overcomes the fact that a subsidiary entity cannot use (and therefore cannot transfer under Division 170) its own losses after joining the group;

Subdivisions 170-A and 170-B had not been amended so they only apply to transfers involving an Australian branch of a foreign bank [Schedule 2, item 2, subsection 707-328(4)]:

-
this ensures the continued operation of the Subdivisions in applying the value and loss donor rules;

the real loss-maker and the relevant donor had sufficient income or gains against which the test loss and the movable loss can be offset (as appropriate) [Schedule 2, item 2, subsection 707-328(5)]:

-
this effectively overrides the fact that losses may only be transferred under Subdivision 170-A or 170-B to the extent that the transferee has income or gains against which the losses can be offset; and

if the relevant loss was actually made in the joining year, it is generally taken to be made for the trial year (this assumption is discussed in paragraphs 9.51 to 9.52) [Schedule 2, item 2, subsection 707-328(6)] .

Modifications to trial year

9.47 Division 170 generally applies when a company seeks to transfer a loss in a particular income year (i.e. the deduction year for a tax loss or the application year for a capital loss). In determining whether that condition is met in the value or loss donor context, the deduction or application year is replaced with a period that:

starts at the later of these times:

-
the start of the trial year; and
-
the start of the loss year; and

ends just after the time the company joined the group.

[Schedule 2, item 2, subsections 707-328(1) and (2)]

9.48 This period is essentially the trial year which generally starts 12 months before, and ends immediately after , the company joined the group. The use of the trial year ensures that a consistent test period is used in all provisions concerning loss transfers (for further information on the trial year see Chapter 6).

9.49 Because a trial year may not match a normal income year, some modifications are needed to ensure that the conditions in Subdivisions 170-A and 170-B can be applied. The first modification is made to ensure that the conditions in sections 170-30 and 170-130 can be met if the trial year were to commence before the loss year. These sections require that the real loss-maker and value donor both be members of the same wholly-owned group during the following income years when both companies were in existence:

the loss year or capital loss year;
the deduction or application year; and
any intervening year.

9.50 Under an actual application of Division 170 it would be impossible for the deduction or application year to commence before the loss year. However, when the trial year is used instead of the deduction or application year it is possible for the trial year to commence before a loss year where the loss is made in a joining year. Without any modification, this would mean that the real loss-maker and the value donor must be members of the same wholly-owned group for the whole of the trial year even if the trial year starts before the loss year. For that reason, the trial year is modified to ensure it does not commence before the start of a loss year.

9.51 A further modification ensures that subsections 170-35(2) and 170-140(3) apply correctly. They prohibit the transfer of a loss where the loss year and the deduction or application year are the same if the loss were calculated under:

the current year loss rules (in sections 165-70 or 165-114 of the ITAA 1997); or
the income injection rules (in sections 175-35 or 175-75 of the ITAA 1997).

9.52 Without a further modification it would be impossible for the loss year and the trial year to be exactly the same period if the loss was made for an income year ending at the joining time. This is because the loss year will end at the time the company joins the consolidated group, but the trial year ends just after. To ensure the 2 periods match, a loss made in an income year ending at the joining time is taken to be made in the trial year. [Schedule 2, item 2, subsection 707-328(6)]

Part year losses

9.53 A further rule ensures that non-membership period losses (which are losses that are referable to only a part of an income year) can be tested to determine if they can be transferred under Division 170. A non-membership period loss may be calculated where an entity joins a group as a subsidiary member during the subsidiarys income year, or an entity exits a group during the entitys income year. The test periods need to reflect the fact that the loss was effectively made for a shortened income year.

9.54 Similar issues arise in testing whether such a loss can be transferred to the head company under Subdivision 707-A. The rules developed for that purpose also apply here for Division 170 testing. A non-membership period loss is taken to be a loss made for an income year that matches the non-membership period (see paragraphs 6.90 to 6.92). [Schedule 2, item 2, section 707-405]

Value and loss donor rules: examples

9.55 A group may have several different donor combinations available to it. Different available fractions may be produced depending on which combination is used. This is shown in Examples 9.1 to 9.3. Each example is based on the facts set out in Example 9.1.

Example 9.1 A wholly-owned group consists of a head company, H Co, and 3 subsidiary companies. The group consolidates on 1 July 2002. At that time, the market value of the group is $10,000.

Value and loss donor rules

In the absence of the value donor concession, the groups available fractions are:
A B C Total
0.3 0.05 0.25 0.6
However, A Co and C Co each have a loss that is transferable to all other group members. B Co has a loss that is only transferable to A Co.One option is to transfer value and losses to A Co. Transferring value and losses to A Co

A Cos loss is transferable to H Co:

-
H Cos modified market value is added to A Cos modified market value.

A Cos loss is transferable to C Co:

-
C Cos modified market value can also be added to A Cos modified market value. Assume only 60% of C Cos value is added. This allows some value to remain with C Co for use in determining an available fraction for C Cos non-transferable loss; and
-
C Cos 2001 loss is moved to A Cos bundle.

A Cos loss is transferable to B Co:

-
B Co could move its value to A Co. However, B Co cannot transfer its loss to A Co, because B Cos loss is not transferable to C Co (one of A Cos other value donors).; and
-
B Co needs to retain its value for an available fraction for its loss. Therefore, neither value nor loss is transferred from B Co to A Co.

As a result of moving H Cos value and 60% of C Cos:

-
A Cos available fraction is:

[$3,000 + $4,000 + (60% * $2,500)] / $10,000 = 0.85;

-
C Cos available fraction for its bundle consisting of the $100 non-transferable loss is:

(40% * $2,500) / $10,000 = 0.1; and

-
B Cos available fraction remains at 0.05.

Therefore, the groups available fractions, and the losses to which they apply are:
A B C Total
0.85 0.05 0.1 1
2001 - $400 tax loss

2001 - $100 tax loss (from Cs bundle)

1999 - $200 net capital loss 2000 - $80 tax loss

Example 9.2: Transferring value and losses to B Co Another option is to transfer value and losses to B Co.

B Cos only loss is transferable to A Co:

-
A Cos modified market value is added to B Cos modified market value; and
-
A Cos loss is moved to B Cos bundle.

B Cos available fraction is:

($500 + $3,000) / $10,000 = 0.35.

Therefore, the groups available fractions, and the losses to which they apply are:
A B C Total
- 0.35 0.25 0.6
1999 - $200 net capital loss

2001 - $400 tax loss (from As bundle)

2000 - $80 tax loss

2001 - $100 tax loss

Example 9.3: Transferring value and losses to C Co Another option is to transfer value and losses to C Co.

C Cos 2001 loss is transferable to H Co:

-
a portion of H Cos modified market value is added to C Cos. The percentage of H Cos value chosen is multiplied by the proportion of C Cos total losses that are transferable to H Co:

(100% * $4,000) * (100 / 180) = $2,222;

C Cos 2001 loss is also transferable to A Co:

-
a portion of A Cos modified market value is added to C Cos:

(100% * $3,000) * (100 / 180) = $1,667; and

-
A Cos 2001 loss is moved to C Cos bundle; and

C Cos available fraction is:

($2,500 + $2,222 + $1,667) / $10,000 = 0.639.

Therefore, the groups available fractions, and the losses to which they apply are:
A B C Total
- 0.05 0.639 0.689
1999 - $200 net capital loss 2000 - $80 tax loss

2001 - $100 tax loss

2001 - $400 tax loss (from As bundle)

Concessional loss method

9.56 A concessional method is available for utilising certain company COT losses transferred during the transitional period. A transferred loss, in a particular loss bundle, may be used in accordance with the concessional method if:

the loss meets the conditions in paragraph 9.57; and
the head company has chosen to use the concessional method for all other losses in the bundle that also meet those conditions.

[Schedule 2, item 2, subsection 707-350(1)]

9.57 The conditions are that the loss:

was originally made outside the group by a company (the real loss-maker) for an income year ending on or before 21 September 1999;
is transferred by the real loss-maker to the head company of the group when the group first consolidates before 1 July 2004 (the initial transfer time);
is transferred because the COT was passed; and
has not been previously transferred to a group.

[Schedule 2, item 2, paragraphs 707-350(1)(a) to (d)]

9.58 A loss chosen for use in accordance with the concessional method is referred to in this explanatory memorandum as a concessional loss .

Concessional losses can be used over 3 years

9.59 Concessional losses may effectively be utilised by the head company over 3 years (subject to the general loss recoupment tests as modified by the rules discussed in Chapter 7). This limit on utilisation replaces that which would otherwise apply under the available fraction method.

9.60 The head company divides its total concessional losses of each sort in a bundle into 3 equal portions. In the first income year that ends after the losses were transferred, the head company can use a maximum of one portion of the losses. [Schedule 2, item 2, subsection 707-350(3), item 1 in the table]

Example 9.4 A group consolidates on 1 July 2002. A bundle of tax and net capital losses is transferred to the head company.The bundle contains 3 concessional tax losses - each worth $100. The maximum amount of tax losses that can be deducted from the bundle in the first year is $100 (one-third of $300).The bundle also contains a concessional net capital loss of $1,500. The maximum amount of the net capital loss that can be deducted from this bundle in the first year is $500 (one-third of $1,500).

9.61 The head company can use another portion in each of the following 2 income years. In addition, it can deduct the remaining amount of a portion that it was unable to use in a prior income year because it had insufficient income. [Schedule 2, item 2, subsection 707-350(3), items 2 and 3 in the table]

9.62 If, after the third income year, the group still has undeducted losses of this sort, then it may use them without restriction (i.e. the limit ceases to apply, though the general loss recoupment tests do apply). [Schedule 2, item 2, subsection 707-350(3), item 3 in the table]

Example 9.5 The Colossal Coal Mining Group consolidates on 1 July 2002.At that time, a $5,000 loss incurred in the 1998 income year is transferred to the groups head company because the COT was passed. The loss is therefore eligible for concessional treatment.The groups first income year after the eligible loss was transferred ends on 30 June 2003. But the group makes a $2,000 loss for that year (and so is not in a position to use any of its transferred losses).The second income year after the transfer of the eligible tax loss ends on 30 June 2004. The group has $2,000 assessable income for that year from which it deducts its $2,000 group loss from the previous year (because group losses must be used before concessional losses). The groups taxable income is nil so the group is still not in a position to use any of its transferred losses.The third income year after transfer of the eligible tax loss ends on 30 June 2005. The groups assessable income less deductions (other than prior year losses) is $10,000. The head company chooses to deduct its transferred loss using the concessional method. Because this is the third income year after the eligible loss was transferred, it may deduct the whole of the $5,000 loss.

9.63 Also, the calculation of the limit is not linked to how many of the losses of the particular sort in the bundle pass or fail the general loss recoupment tests.

Example 9.6 One of the 3 concessional tax losses in the bundle referred to in Example 9.4 fails the general loss tests so it cannot be deducted. The maximum amount of tax losses that can be deducted is still calculated by reference to the sum of the tax losses in the bundle. This means that the maximum amount of tax losses that can be deducted from the bundle is still $100 (drawn from the other 2 tax losses that have passed the general loss tests).

Order of use

9.64 Concessional losses of a sort are used after group losses of the same sort. Group losses are losses generated by a group after its formation. This overrides the normal rule that oldest losses are used first. [Schedule 2, item 2, subsection 707-350(2)]

9.65 Concessional losses of a sort must effectively be used before other (non-concessional) transferred losses of the same sort, allowing groups the earliest possible access to the concession. As part of achieving this, concessional losses are taken not to be transferred losses for the purposes of Subdivision 707-C . This ensures that the relevant income and gain categories are reduced by concessional losses before applying the available fraction (see paragraphs 8.21 to 8.36). [Schedule 2, item 2, subsection 707-350(4)]

Making the choice

9.66 The method is optional. A head company that wishes to use the concessional method must choose to do so by the day it lodges its income tax return for the income year in which it first uses any of its transferred losses. The choice, if made, must be made for all eligible losses in a particular bundle (regardless of their sort). [Schedule 2, item 2, paragraph 350(1)(e) and subsection 707-350(5)]

9.67 Regardless of when the choice is made, it will not have effect until the income year in which transferred losses are first used. It applies to that income year and to all later income years and is irrevocable. [Schedule 2, item 2, subsection 707-350(6)]

Further transfer of concessional losses

9.68 The use limit imposed by the concession does not prevent the whole of a concessional loss (or its unused amount) being transferred again (i.e. to another consolidated group) [Schedule 2, item 2, subsection 707-350(7)] . However, if concessional losses are transferred again, they lose their concessional status [Schedule 2, item 2, paragraph 707-350(1)(d)] .

9.69 For that reason, concessional losses can be said to retain a link to their loss bundle. That is, if transferred again they revert to being transferred losses subject to the available fraction limit attached to the bundle.

Application and transitional provisions

9.70 The measures discussed in this chapter will apply to certain losses transferred to a group that consolidates during the transitional period (i.e. 1 July 2002 to 30 June 2004).

Consequential amendments

9.71 Consequential amendments have been made to subsection 995-1(1) to include references to new dictionary terms. [Schedule 5, item 18]


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