Explanatory Memorandum(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
Chapter 7 - Loss carry-back consequential amendments
Outline of chapter
7.0 This chapter explains consequential amendments to the income tax law that are necessary as a result of implementing the loss carry-back measure.
7.1 All legislative references in this chapter are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.
Loss carry-back consequential amendments
Utilising tax losses and capital losses
7.2 The current law defines when tax losses and net capital losses are utilised. This definition is amended to cover other forms of utilising those things (including for loss carry-back purposes) and extends it to cover utilising net exempt income. The definition is also relocated. [Schedule 6, items 2, 30, 31 and 41, section 707-110, section 960-20 and the definition of 'utilise' in subsection 995-1(1)]
7.3 As the measure introduces a general rule about utilising tax losses, net capital losses, and amounts of net exempt income, some existing rules that detail how things are utilised are repealed. Other provisions are amended to reflect the new definition. Some notes about the general utilising rule are added to help readers. [Schedule 6, items 1 to 29, 32, 33, and 42 to 48, section 45B of the ITAA 1936, sections 4-15, 26-47, 35-15, 36-1, 36-15, 36-17, 36-45, 65-10, 102-10, 102-15, 165-114, 165-115R, 170-20, 170-45, 170-115, 170-145, 707-100 and 707-115 of the ITAA 1997, section 707-30 of the Income Tax (Transitional Provisions)Act 1997 (IT(TP)A 1997), sections 45-330 and 45-480 of Schedule 1 to the Taxation Administration Act 1953]
The general anti-avoidance rule
7.4 The amendments modify the income tax general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) so that it applies to schemes entered into with the purpose of obtaining a loss carry-back tax offset.
7.5 The general anti-avoidance rule works by identifying a scheme and a tax benefit that is produced for a taxpayer by the scheme. The Commissioner of Taxation (Commissioner) can cancel the tax benefit if it can be concluded (after examining eight listed factors) that someone entered into the scheme for the dominant purpose of providing the taxpayer with the tax benefit.
7.6 A 'tax benefit' is defined as being an amount not being included in the taxpayer's assessable income, a deduction or capital loss being incurred by the taxpayer, or a foreign income tax offset being allowable to the taxpayer. The amendments extend that definition to include a loss carry-back tax offset being available to the taxpayer. [Schedule 5, items 28 to 30, the definition of 'loss carry-back tax offset' in subsection 6(1), paragraphs 177C(1)(baa) and (ea) of the ITAA 1936]
7.7 As with the existing tax benefits, the tax benefit from gaining a loss carry-back tax offset does not apply if the offset arises from making a choice expressly provided for by the income tax law unless the scheme was entered into for the purpose of enabling the choice to be made. [Schedule 5, items 31 to 34, subsections 177C(2) and (3) and of the ITAA 1936]
7.8 If Part IVA is satisfied, the Commissioner can make a determination to cancel the tax benefit. The possible determinations, which separately cover each type of tax benefit, are extended to include determinations in relation to tax benefits from a loss carry-back tax offset. [Schedule 5, items 36 and 37, paragraphs 177F(1)(c) and (ca) of the ITAA 1936]
7.9 When the Commissioner makes a determination to cancel a tax benefit, he or she can also make any compensating adjustments needed to put any taxpayers into the tax position they would have been in if the scheme had not been entered into. The amendments allow the Commissioner to make compensating adjustments to provide taxpayers with the loss carry-back tax offset that would have been available apart from the scheme. [Schedule 5, items 38, paragraph 177F(3)(ca) of the ITAA 1936]
7.10 The Tax Laws Amendment (Integrity) Bill 2013 is contemporaneously amending the general anti-avoidance rule to address weaknesses revealed by some recent court cases. The amendments made by that Bill are extended to ensure that they also cover tax benefits by way of a loss carry-back tax offset being available to a taxpayer. That extension occurs only after those amendments commence. [Schedule 5, item 35, paragraph 177CB(1)(ca) of the ITAA 1936 and clause 2, table item 12]
Pooled development funds
7.11 A company that makes a tax loss in an income year that it ends as a pooled development fund (a PDF) can only deduct that loss in a later income year in which it is a PDF for the whole year.
7.12 The amendments extend the same treatment to the loss carry-back tax offset. They prevent a corporate tax entity carrying back a tax loss that arose in a year it ended as a PDF, unless it was a PDF throughout both the current year and the year the loss was carried back to. [Schedule 6, items 52, 53 and 57, sections 36-25 and 192-37]
7.13 As with the current law treatment of deductions for tax losses, there is no restriction on a PDF carrying back any tax loss that arose in a year it did not end as a PDF. Nor is there any restriction on carrying back a tax loss that arose in the part of a year before the company became a PDF. [Schedule 6, items 55 and 56, subsection 195-15(5)]
Venture capital and similar limited partnerships
7.14 The current law prevents a limited partnership from deducting a tax loss in an income year in which it is a venture capital limited partnership, an early stage venture capital limited partnership, an Australian venture capital fund of funds, or a venture capital management partnership.
7.15 These entities cannot be corporate tax entities and so cannot claim the loss carry-back tax offset. However, if a limited partnership stops being one of these venture capital entities and becomes a corporate tax entity, it might claim the offset by carrying a loss back to a year in which it was one of those entities. That would provide the entity with an offset based on a year in which it was not a corporate tax entity and so would not have been able to deduct a tax loss. To preserve the symmetry with deducting tax losses, the amendments prevent a limited partnership carrying a tax loss back to a year in which it was a venture capital entity. [Schedule 6, items 54 and 58, sections 36-25 and 195-72]
7.16 Each partner in a venture capital partnership usually gets his or her share of the partnership's loss (subsection 92(2) of the ITAA 1936). However, a limited partner can only deduct its share of partnership losses to the extent of its contributions to the partnership (subsection 92(2AA) of the ITAA 1936). The remaining part of a limited partner's share of partnership losses is its 'outstanding subsection 92(2AA) amount' (subsection 92A(2) of the ITAA 1936). That amount can be deducted under some circumstances but can never be used to produce a tax loss for the limited partner (subsections 92A(1) and (3) of the ITAA 1936).
7.17 As the outstanding subsection 92(2AA) amount of a limited partner in a venture capital partnership cannot be part of a tax loss for the partner, it cannot be used to produce a loss carry-back tax offset the limited partner might claim if it is itself a corporate tax entity. [Schedule 6, item 49, subsection 92A(3) of the ITAA 1936]
Life insurance companies
7.18 For income tax purposes, life insurance companies carry on two broad categories of business: complying superannuation business and ordinary business. The earnings on complying superannuation business are taxed in broadly the same way, and at the same rate, as earnings made by complying superannuation funds. Earnings on the ordinary business are taxed at the corporate tax rate.
7.19 To ensure that the tax treatment of the complying superannuation business of life insurance companies continues to be the same way as that of complying superannuation funds, loss carry-back tax offsets are not available in respect of that complying superannuation business. They are available in respect of ordinary business. [Schedule 6, item 64, paragraph 320-149(2)(aa)]
7.20 Foreign hybrid limited partnerships are entities that are partnerships under foreign law but would normally be treated as companies for the purposes of Australia's income tax law. A special regime ensures that they are generally treated as ordinary partnerships for purposes of the income tax law (see Division 830).
7.21 Foreign hybrid limited partnerships are not eligible for loss carry-back tax offsets (which are only available to corporate tax entities). However, a partner in such a partnership would get a share of the partnership loss and could, if it were itself a corporate tax entity, seek to claim a loss carry-back tax offset. There are limits on the extent to which partners can claim a deduction for a tax loss flowing to them from a foreign hybrid limited partnership. To preserve symmetry with deducting tax losses, the amendments ensure that the same limits apply to the partner's use of that loss for loss carry-back. [Schedule 6, item 65, subsection 830-65(3)]
7.22 Generating a refund from a loss carry-back tax offset (or any other refundable tax offset) will result in the entity's franking account being debited by the amount of the refund (see subsection 205-30(1), table item 2). The debit only applies to entities that are Australian residents because foreign residents are generally outside the Australian imputation system.
7.23 However, there are rare cases where a foreign resident entity does have an amount in its franking account. Therefore, a debit will arise in the franking account of foreign resident entities that get a refund. The debit is limited to the balance in the franking account. This ensures that the entity will not become liable for franking deficits tax as a result of obtaining the refund. Similar amendments extend the same treatment to foreign resident entities that are within the imputation regime for life insurance companies. [Schedule 6, items 59, 62 and 63, subsections 205-30(1), 219-30(1) and(2)]
7.24 To avoid any doubt that an entity that gets a refund arising from a loss carry-back tax offset 'receives a refund of income tax' (and so attracts the debit to its franking account), the definition of that expression is amended to include income refunds arising from loss carry-back tax offsets. [Schedule 6, items 60 and 61, subparagraph 205-35(1)(b)(ii)]
Working out PAYG instalments
7.25 A taxpayer's PAYG instalments are advance payments of income tax the taxpayer makes throughout a year. When that year's assessment is made, the instalments are credited towards payment of the year's tax liability.
7.26 The instalments are worked out by applying a rate to the gross amounts the taxpayer earns during the year. The rate used is usually that provided by the Commissioner, based on the tax payable on the taxable income for the previous year. In working out that taxable income, the Commissioner does not count one-off amounts (for example, capital gains) that are unlikely to be repeated. One such amount is any deduction for a tax loss (paragraph 45-330(1)(b) of Schedule 1 to the Taxation Administration Act 1953 ).
7.27 The amendments ensure that a reduction in tax in the previous year as a result of a loss carry-back tax offset is similarly not reflected in calculating the rate the Commissioner provides for the next year's PAYG instalments. [Schedule 6, item 66, paragraph 45-340(dc) of Schedule 1 to the Taxation Administration Act 1953]
Assessments and objections
Refund from tax offsets is part of an assessment
7.28 A corporate tax entity that claims a loss carry-back tax offset should be able to object to the amount of any refund arising from the offset. Therefore, the amendments extend the definition of 'assessment' to include the amount of a refund arising from the taxpayer's refundable tax offsets. [Schedule 5, items 9, 11 and 12, definitions of 'assessment' and 'tax offset refund' in subsection 6(1) of the ITAA 1936 and definition of 'tax offset refund' in subsection 995-1(1) of the ITAA 1997]
7.29 As a result, the right to object to an assessment is extended to cover objections to the amount of the refund from the taxpayer's refundable tax offsets (see subsection 175A(1) of the ITAA 1936). In addition, the amount of a tax offset can only be changed through the amendment of an assessment and must therefore occur within the time limits for amending an assessment (section 170 of the ITAA 1936).
7.30 A number of consequential amendments are made because of the change in the meaning of 'assessment' to include refunds arising from refundable tax offsets. [Schedule 5, items 14, 15 and 16, sections 166, 166A and 168 of the ITAA 1936]
7.31 If, as a result of an amendment to an assessment, the total of a person's tax offset refunds is increased the Commissioner must apply the amount of the increase in accordance with the relevant part of the running balance account provisions. [Schedule 5, item 17, subsection 172A(1) of the ITAA 1936]
7.32 Similarly, if, as a result of an amendment to an assessment, the total of a person's tax offset refunds is reduced, the person is liable to pay the amount of the reduction. The amount is due 21 days after the Commissioner gives the person notice of the amended assessment. [Schedule 5, item 17, subsection 172A(2) of the ITAA 1936]
7.33 If the amount that the person is liable to pay remains unpaid after the time by which it is due to be paid, the person is liable to pay the general interest charge on the unpaid amount for each day in the period that:
- starts at the beginning of the day on which the amount was due; and
- finishes at the end of the last day on which the amount, or the general interest charge on the amount, remains unpaid.
[Schedule 5, items 17, 22 and 23, subsection 172A(3) of the ITAA 1936 and subsection 8AAB(4) and 250-10(1) in Schedule 1 to the Taxation Administration Act 1953]
Returns of full self-assessment taxpayers
7.34 The returns of full self-assessment taxpayers (mostly companies) are deemed to be assessments made by the Commissioner at the time they are lodged (subsection 166A(3) of the ITAA 1936). Therefore, it is important that their returns contain all the information that an assessment needs to include. At the moment, the required information includes an entity's taxable income and the tax payable on that income. The amendments ensure that the required information also includes the amount of the entity's refund arising from its refundable tax offsets (which the amendments make part of an assessment). [Schedule 5, item 13, paragraph 161AA(ba) of the ITAA 1936]
Objections in nil' tax liability cases
7.35 If an entity is assessed as having no taxable income or no tax liability, taxpayers can object only if they are seeking to increase the liability. The amendments modify this approach by permitting objections which allow the taxpayer to increase a refundable tax offset. This ensures that taxpayers have a right to object to the amount of a refund where an entity has no tax liability. [Schedule 5, items 18, 19 and 20, subsections 175A(2) and (3) of the ITAA 1936]
Burden of proof on appeal
7.36 A taxpayer who is dissatisfied with a decision the Commissioner makes on their objection can take their dispute to the Administrative Appeals Tribunal or the Federal Court. A taxpayer who does that has the burden of proving that the Commissioner's decision was 'excessive'. As a result of the High Court's decision in FCT v Dalco (1990) 168 CLR 614, the taxpayer must prove, not just that the assessment is too high, but what the correct amount of the assessment is.
7.37 This causes a difficulty to arise if a taxpayer wants to show that the assessment is not high enough, as will usually be the case with assessments of the amount of a refund arising from refundable tax offsets. Therefore, the amendments change the 'burden of proof' rules so that the taxpayer must prove that:
- in the normal case - the assessment is excessive; or
- where the taxpayer contends that the assessment should be higher - the assessment is incorrect.
7.38 In either case, the taxpayer must also prove what the correct amount of the assessment is, preserving the effect of the Dalco decision. [Schedule 5, items 25 and 26, paragraphs 14ZZK(b) and 14ZZO(b) of the Taxation Administration Act 1953]
Delayed application of the assessment and objection amendments
7.39 Changes will need to be made to the Australian Taxation Office's systems to bring the calculation of the amount of a taxpayer's refunds arising from refundable tax offsets into the assessment regime. As this will take some time to implement, the amendments to the assessment provisions only apply to assessments for the 2013-14 and later income years made on or after 1 July 2013. [Schedule 5, items 24 and 27]
7.40 For the period before the assessment provisions apply, taxpayers will receive a notice of the amount of their refund from refundable tax offsets. The calculation of the amount in the notice is not an assessment. However, taxpayers can object to the notice separately from their right to object to their normal income tax assessment. [Schedule 5, item 10, subsections 67-115(2) and 67-135(1) of the IT(TP)A 1997]
7.41 The objection must be lodged within the same period that the taxpayer could lodge an objection to an assessment for the relevant income year. If there is no notice of assessment for the year, the objection period is as long as the period would have been if notice of an assessment had been given on the date of the notice. [Schedule 5, item 10, subsection 67-135(3) of the IT(TP)A 1997]
7.42 The amendments empower the Commissioner to:
- provide taxpayers with a notice of the amount of their refund arising from refundable tax offsets; and
- include the notice in some other notice the Commissioner is providing the taxpayer (it would usually be included in the notice of assessment).
The Commissioner can provide the notice electronically if the taxpayer's return is lodged electronically. [Schedule 5, item 10, section 67-100 of the IT(TP)A 1997]
7.43 The Commissioner is deemed to provide a notice, if the taxpayer is a full self-assessment entity, when the taxpayer lodges its return for the 2012-13 income year. The notice is deemed to specify the amount of the entity's tax offset refunds in accordance with the return. [Schedule 5, item 10, section 67-105 of the IT(TP)A 1997]
7.44 If the Commissioner does not provide a notice, taxpayers can request the Commissioner to provide a notice during the period within which they can object to their assessment for that year, or within two years after the end of the income year if there is no notice of assessment. As with assessments, the Commissioner can allow more time to object. [Schedule 5, item 10, subsections 67-110(1) and (2) of the IT(TP)A 1997]
7.45 If the Commissioner does not provide the notice within 60 days of the request, the Commissioner is taken to have provided a notice that the taxpayer is not entitled to a tax offset refund on the 60th day after the request. That will trigger the taxpayer's right to object to the notice. [Schedule 5, item 10, subsection 67-110(3) of the IT(TP)A 1997]
7.46 The Commissioner can amend a notice. An amended notice is treated as any other notice except that the taxpayer's right of objection is limited to the extent of any change from the amendment. The taxpayer's right to object to the original notice still remains. [Schedule 5, item 10, section 67-120 and subsection 67-135(2) of the IT(TP)A 1997]
7.47 The rules about the validity of assessments, and about the due making and correctness of assessments, apply equally to notices of the amount of the refund. [Schedule 5, item 10, sections 67-125 and 67-130 of the IT(TP)A 1997]
7.48 If the Commissioner does not give notice of the amount of the refund, this does not affect either:
- a taxpayer's right to the refund; or
- the time by which the refund must be applied or refunded under the running balance account rules.
[Schedule 5, item 10, subsection 67-115(1) of the IT(TP)A 1997]
7.49 The existing right to object to the amount of a tax offset for research and development expenditure is repealed for objections made on or after 1 July 2013. An objection made after that date will be dealt with:
- if the tax offset is part of an assessment for the 2013-14 or a later income year - under the normal assessment provisions; or
- if the objection relates to an offset for an earlier income year - under the interim arrangements.
[Schedule 5, items 7, 8 and 21]
7.50 The amendments add a number of definitions to the income tax law for the purposes of the loss carry-back tax offset measure. In some cases, existing definitions are expanded and relocated to reflect their extra application to loss carry-back. [Schedule 5, items 3, 9, 11, 12 and 28, Schedule 6, items 34 to 41, definitions of 'assessment', 'loss carry back tax offset' and 'tax offset refund' in subsection 6(1) of the ITAA 1936, section 960-20 and definitions of 'carry back', 'current year', 'income tax liability', 'loss carry back choice', 'loss carry back tax offset', 'loss carry back tax offset component', 'tax offset refund', 'unutilised' and 'utilise' in subsection 995-1(1) of the ITAA 1997]
7.51 The non-operative lists of relevant provisions about tax offsets and tax losses are amended to include references to the loss carry-back tax offset. [Schedule 6, items 50 and 51, sections 13-1 and 36-25]
Application and transitional provisions
7.52 The amendments to the assessment provisions of the income tax law apply to an assessment if the assessment is made on or after 1 July 2013, and:
- if the assessment relates to an income year, the income year is the 2013-14 income year or a later income year; or
- if the assessment relates to another accounting period, the other accounting period commences on or after 1 July 2013.
[Schedule 5, item 27]
7.53 The other amendments commence on the day after Royal Assent.