Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)
Capital Gains Tax - Transfer of Capital Losses
Purpose of amendment: The Bill proposes a technical amendment to subsection 160ZP(7A) which will require that in determining the amount of a capital loss which can be transferred to a group company, the cost base of shares and loans held in the loss company is to be determined as at the end of the year of income of the transferee company, rather than at the time when the agreement to transfer the loss is made.
Date of effect: The amendment to subsection 160ZP(7A) applies to agreements made between group companies after 16 December 1992. [Clause 51]
Section 160ZP provides a mechanism whereby a company which realises a capital loss in a year of income may transfer the loss to another group company [as defined in subsection 160ZP(1)] in order for the transferee company to offset the loss against realised capital gains.
By paragraph 160ZP(7)(c), the "loss company" and the "gain company" agree to the transfer to the gain company of any part of a capital loss realised by the loss company which is not utilised by the loss company to offset its own realised gains. Subsection 160ZP(7AA) sets out the form and time of the agreement.
The amount of the capital loss that can be transferred is limited by subsection 160ZP(7A) to an amount equal to the cost base of shares or loans held by other group companies in the loss company.
A technical deficiency has been identified in the operation of this provision. By subsection 160ZP(7AA) the agreement must be made "before the date of lodgment of the return of income of the gain company for the gain year or within such further time as the Commissioner allows".
However, in examining the cost base of the equity held by group companies in the loss company, subsection 160ZP(7A) requires the amount of equity to be determined "at the time the agreement was made". This requirement is not appropriate because the agreement may be made later than the year of income in which the loss was transferred, and the underlying interests in the loss company may have changed in the intervening period.
An amendment to subsection 160ZP(7A) will specify that the cost base of shares or loans held by group companies in a loss company is to be determined at the end of the year of income of the transferee company, rather than at the time when the agreement to transfer the loss is made. [Clause 50]