House of Representatives

Income Tax Assessment Bill 1996

Income Tax Assessment Act 1997

Income Tax (Consequential Amendments) Bill 1996

Income Tax (Transitional Provisions) Bill 1996

Income tax (Transitional Provisions) Act 1997

Explanatory Memorandum

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

Chapter 7 - Company Losses

This chapter summarises the rewritten rules for company losses and explains the changes that the Income Tax Assessment Bill 1996 will make to those rules.

Overview of this chapter

This chapter deals with the rules about company losses.

The first part of the chapter summarises the company loss rules as they are to be rewritten by Divisions 165 and 175 and Subdivisions 170-A, 195-A and 975-W of the Income Tax Assessment Bill 1996 .

The second part explains the proposed changes in content.

The existing law on company losses is contained in sections 79EA, 79EB, 80A, 80B, 80DA, 80E and 80G and Subdivision B of Division 2A of Part III of the Income Tax Assessment Act 1936.

This summary is to orient readers to how the new law is structured and expressed. As these provisions have been in the law for some time, there is no need for a detailed exposition. An explanation is given of changes proposed to the company losses provisions.

A. Summary of the new law

Deducting tax losses of earlier income years [Subdivision 165-A]

The general rule is

A company cannot deduct a tax loss of an earlier year unless:

·
it had the same majority ownership throughout both the loss year and the income year; and
·
no person controlled the voting power in the company at any time during the income year who did not control it throughout the loss year;

or the company has continued to carry on the same business.

Has a company maintained majority ownership?

Ownership is measured by:

·
voting power;
·
rights to dividends; and
·
rights to capital distributions.

To determine majority ownership:

·
apply the primary test ; or
·
if at least one company is a beneficial owner of shares in the company, apply the alternative test .

(See 'Tests for finding out whether the company has maintained the same owners' page 65.)

Alternatively, has the company continued to carry on the same business?

If majority ownership has changed or there is a change of control, the company must carry on throughout the income year the same business as it did immediately before:

·
the change in ownership that caused the failure to maintain majority ownership; or
·
the change in control of the voting power.

(See 'The same business test' page 65.)

A company can deduct part of a tax loss of a prior year

If it would have been able to deduct it, had the period of the loss year in which the part loss was incurred been a whole year.

Working out the taxable income and tax loss for the income year of the change [Subdivision 165-B]

The general rule is

How a company works out its taxable income is affected if, during the income year it:

·
experienced a change in majority ownership or control of voting power;
·
did not maintain the same business; and
·
incurred a notional loss in a period whether before or after the change in ownership or control.

Has a company maintained majority ownership during the year?

Ownership is judged from the:

·
voting power in the company;
·
rights to its dividends; and
·
rights to its capital distributions.

There is a primary test of majority ownership and an alternative test for cases where one or more companies beneficially own shares in the company.

(See 'Tests for finding out whether the company has maintained the same owners' page 65.)

Has the company carried on the same business?

If majority ownership has not been maintained or there is a change of control, the company is required to carry on the same business throughout the rest of the income year as it carried on immediately before either:

·
the change that broke the continuity of majority ownership; or
·
the change in control of the voting power.

(See 'The same business test' page 65.)

Did the company incur a notional loss in a period?

The income year when the change takes place is divided into periods set by when a change in majority ownership or control occurred (except where the same business is maintained after the change). A notional loss or notional taxable income is worked out for each period.

To work out a company's taxable income for an income year of change

Add: each amount of notional taxable income and any full year amounts as described below.

Subtract: any full year deductions (as described).

The amount remaining is the taxable income for the year.

Notional taxable income is

The excess of a company's assessable income attributable to a period over the deductions attributable to the period.

Full year amounts are

Amounts of assessable income derived by a company as a beneficiary of a trust, which are not reasonably attributable to a particular period.

Full year deductions are

Deductions of a company that are not attributable to a particular period.

To work out a company's tax loss for an income year of change

Add: each notional loss and any excess full year deductions.

Subtract: any net exempt income.

The amount remaining is the tax loss for the year.

A notional loss for a period is

Any amount by which deductions attributable to the period exceed assessable income attributable to the period.

Excess full year deductions are

The excess of allowable deductions for bad debts and certain prepaid expenses over the sum of notional taxable income amounts and full year deductions.

Net exempt income is

Exempt income (other than certain income that has been exempted in order to prevent double taxation), reduced by any expenses incurred in deriving that income.

If a company is a member of a partnership

The company's share of:

·
any notional net income of the partnership for a period is assessable income of the company for the period; and
·
any notional loss of the partnership for the period is a deduction of the company for the period.

The partnership's notional net income or notional loss for a period is

·
calculated in the same way as the notional loss or notional taxable income of the company, if the partnership and the company have the same income year;
·
if not, it is so much of the partnership's net income or loss of the income year as was derived during the period.

The company's share of notional net income or loss of the partnership for a period is

The amount that reflects the company's interest in the net income or loss of the partnership.

Tests for finding out whether the company has maintained the same owners [Subdivision 165-D]

The primary test is

There are persons who, between them at all times during a relevant period, beneficially own shares that carry more than 50% of the company's ownership rights.

The alternative test is

It is reasonable to assume, after tracing through interposed entities, there are individuals who between them at all times during the relevant period:

·
are able to control the voting power in the company;
·
would receive more than 50% of any dividend paid; and
·
would receive more than 50% of any distribution of capital.

Public companies

A public company is taken to have satisfied the primary test if it is reasonable to assume it has done so.

The primary and alternative tests are standard

They apply to the prior year and current year loss provisions.

The relevant period can be

For prior year losses: the loss year; the income year; or any intervening period between the loss year and the income year.

For current year losses: the income year.

Commissioner may treat shares as not being beneficially owned by a person if

An arrangement relating to the beneficial interest in the shares, or a right to them, was entered into to reduce a person's liability to income tax.

The same business test [Subdivision 165-E]

The same business test is satisfied if

Throughout the income year (for prior year losses) or the rest of the income year (for current year losses) the company carries on the same business as it did immediately before a change in majority ownership or control.

However it must not:

·
derive income from a business of a kind that it did not carry on earlier;
·
derive income from a transaction of a kind that it had not previously entered into in the course of its business operations;
·
commence a business or initiate a transaction in order to meet the same business test.

For the purpose of calculating the company's taxable income and tax loss for the year of change (see above)

Things that prevent a company from being taken to have carried on the same business as it carried on before are:

·
incurring expenditure in carrying on a business of a kind that it did not previously carry on;
·
incurring expenditure as a result of a transaction of a kind not previously entered into in its business operations.

Use of a company's tax losses or deductions to avoid income tax [Division 175]

For prior year losses the general rule is

The Commissioner can disallow a deduction for some or all of a tax loss if:

·
income is injected into a company because the tax loss is available (except where the continuing shareholders benefit); or
·
someone other than the company would obtain a tax benefit in connection with a scheme entered into because a deduction was available for the tax loss (except a person who beneficially owns shares in the company and for whom the benefit is fair and reasonable).

Who are the continuing shareholders?

These are the beneficial owners of shares in the company who are taken into account to see whether the company maintained majority ownership during the loss year and the income year.

The general rule does not apply if

Although the company fails to maintain majority ownership, it satisfies the same business test for the income year.

For current year losses the general position is

The Commissioner can disallow deductions if:

·
income is injected into a company because deductions are available (and the income does not benefit continuing shareholders);
·
losses or outgoings are loaded into the company because it has assessable income to absorb deductions against (except again where continuing shareholders benefit);
·
a person other than the company obtains a tax benefit from a scheme entered into because the company had incurred a loss or outgoing giving rise to the deduction (unless the person is a beneficial owner of shares in the company for whom the benefit is fair and reasonable); or
·
a person other than the company would obtain a tax benefit from a scheme entered into because the company had derived assessable income before the company incurred a loss or outgoing that gave rise to the deduction (again excepting a beneficial owner of shares for whom the benefit is fair and reasonable).

Who are the continuing shareholders?

Persons who beneficially own shares before and after the income or losses or outgoings are injected into the company.

Transfer of tax losses within wholly-owned groups of companies [Subdivision 170-A]

The general rule is

A resident company with a tax loss can transfer it to another resident company if the companies are members of the same wholly-owned group at all times during:

·
the income year in which the loss was incurred ;
·
the income year for which the tax loss is transferred; and
·
any intervening income year.

Effects of the transfer

The income company is taken to have incurred the loss in the year in which it was incurred by the loss company.

However, if the loss is transferred for the year in which it was incurred the income company is taken to have incurred the loss in the preceding year. This allows the income company to deduct the loss as though it were a loss of a prior year.

The income company must deduct the loss immediately.

The amount that can be transferred cannot exceed

·
the amount that the loss company could deduct, if it had sufficient income in the deduction year; or
·
that the income company can deduct without creating a loss for itself.

Order in which losses may be transferred

·
Tax losses (other than film losses) can only be transferred in the order in which they were incurred.
·
Film losses are transferred before other losses, in the order in which they were incurred.

Any payment for the loss (subvention payment)

·
is not assessable income or exempt income of the loss company; and
·
cannot be deducted by the income company.

The transfer agreement

A transfer can only take place by a duly made written agreement.

Wholly-owned group companies [Subdivision 975-W]

The general rule is

Two companies are members of the same wholly-owned group if:

·
one is a 100% subsidiary of the other; or
·
each is a 100% subsidiary of a third company.

A company is a 100% subsidiary of a holding company if

All its issued shares are beneficially owned by:

·
the holding company;
·
one or more 100% subsidiaries of the holding company; or
·
the holding company and one or more of its 100% subsidiaries.

Any companies that are 100% subsidiaries of another full subsidiary are also subsidiaries of the holding company.

A company is not a 100% subsidiary if

A person can affect the rights of the holding company in relation to the subsidiary.

Pooled development funds [Subdivision 195-A]

The general rule is

If a company is a Pooled Development Fund at the end of an income year for which it has a tax loss:

·
it can deduct the tax loss in a later income year only if it is a PDF throughout the later income year; and
·
it cannot transfer any of the tax loss to another company.

B. Discussion of changes

Removal of discretions

One of the aims of this rewrite of the law is to replace with objective criteria many of the discretions that the Commissioner of Taxation may exercise under the existing law, to more fully reflect the introduction of the self assessment system.

Where a discretion is being replaced with more specific criteria, that change is explained in the explanatory material on the new law. In many cases, however, the change will merely replace the rest of what the Commissioner considers to be reasonable with a simple test of reasonableness. In these cases, the explanatory material will only identify the clauses where such a change has occurred. In this Division, those clauses are 165-20, 165-55(3), 165-60(2), 165-80, 165-85, 165-90, 165-150(2), 165-155(2), 165-160(2), 165-165(2) and 170-25(1).

Losses of corporate taxpayers

Subdivision 165-A Deducting tax losses of earlier income years

This Subdivision will set out the conditions that a company must satisfy before it can deduct a tax loss incurred in an earlier year (a prior year loss).

Change

The Bill will separate out from the operative loss deduction provisions the tests for determining whether a company has maintained majority ownership or continued to carry on the same business.

Explanation

The tests are being standardised for both the current and prior year loss provisions. This structural change will not affect the application of the two tests and the outcome is the same as under the existing law.

Clause 165-12 Company must maintain the same owners

This clause will set out the conditions that must be satisfied in order for a company to be treated as maintaining the same majority ownership.

Change

When testing beneficial ownership in a company there are two measures. The second of these, the alternative test, will now automatically apply where one or more companies beneficially own shares in the company claiming the loss.

Explanation

Under the existing law, the alternative test applies for prior year losses only if:

·
the loss company requests the Commissioner to apply it; or
·
the Commissioner considers it reasonable to do so.

For current year losses, the existing law applies the alternative test in a similar way as now proposed.

The role of the Commissioner in the present law is inconsistent with the self-assessment system.

Clause 165-13 Alternatively, company must carry on same business

This clause will set out when a company must satisfy the same business test.

Change

It will clarify precisely when a change of beneficial ownership has occurred that results in a company not maintaining majority ownership.

Explanation

Broadly, the section will require a company to carry on the same business at all times during the income year as it carried on immediately before a change of beneficial ownership that results in it not maintaining its majority ownership.

The existing law does this less explicitly.

Clause 165-15 Same people must control the voting power, or company must carry on same business

This clause will provide that a prior year loss cannot be deducted if:

·
there is a change in control of the voting power in the loss company during the loss year or the income year; and
·
a reason for the change is to give someone a benefit or advantage under the Act.

Change

Even if there is a change of control of voting power, the loss company can deduct the loss if it satisfies the same business test.

Explanation

Under the existing law, if there is a change of control in the company's voting power, the same business test does not apply.

However, such a change generally precedes, or is part of, a change of beneficial ownership of shares that results in a company failing to maintain majority ownership. As the same business test already applies to this outcome, it should also apply where there is a change in control. It will simplify the law if both cases are subject to the same business test.

Subdivision 165-B Working out the taxable income and tax loss for the income year of the change (the 'current year loss provisions')

This Subdivision sets out how a company must calculate its taxable income and tax loss if:

·
majority ownership or control changes during a year; and
·
it does not satisfy the same business test.

1. Change

The tests for whether a company has maintained continuity of ownership or carried on the same business will be separated from the provisions that apply them.

Explanation

The change will enable the two tests to be stated once and drawn on for the purposes of both the current year loss provisions, and the prior year loss provisions.

The change in structure will not change the outcome from applying the tests.

2. Change

A company will not have to apply the current year loss provisions if it satisfies the same business test for a year in which there is a change in its majority ownership or control [paragraph 165-35(b) and subclause 165-40(2)] .

Explanation

Under the existing law, if a company experiences a change of majority ownership or control it has to apply the current year loss provisions even if it maintains the same business throughout the year. This involves complex calculations of income and losses of periods. Despite this compliance burden, the company's tax liability would be no different from what it would have been if the current year loss provisions did not apply.

The change will eliminate unnecessary application of the current year loss provisions.

3. Change

A further simplification is where a company is subject to more than one change in ownership during a year. In such a case a company will not be required to treat as separate, adjacent periods between which the company has continued the same business [subclause 165-45(4)] .

Explanation

Under the existing law, once the current year loss provisions apply, a company must account separately for each period that is separated by a change in majority ownership, regardless of whether the same business has been maintained between the periods. The Bill will treat what are, under the existing law, separate adjoining periods as a single period, if there is a change in majority ownership but not of business.

This will simplify accounting requirements where a company experiences more than one change of ownership but maintains the same business across one or more of the changes. The change will remove lengthy and complex provisions from the existing law. This will make it easier to know and apply the law.

As a result of this change, a company will not be able to set off a loss of a period against the income of a non-adjoining period where, following a change in majority ownership and a change of business, a restoration of the previous majority ownership takes place.

Clause 165-37 Who has a more than 50% stake in the company during a period

This clause will set out:

·
the criteria for determining whether a company has maintained continuity of ownership; and
·
whether the primary or alternative test is to be applied to determine the issue.

Change

The primary test will apply, where appropriate, in determining whether a company has maintained continuity of beneficial ownership for the purposes of the current year loss provisions.

Explanation

The existing law applies an equivalent of the alternative test which requires tracing through to the natural persons who are the beneficial owners of the shares.

The outcome will be the same under the rewritten provisions because the alternative test will be applied where one or more companies are beneficial owners of shares in the company.

The change helps standardise the continuity of beneficial ownership test.

Clause 165-50 Next, calculate the notional loss or taxable income for each period

This clause will identify whether a company has, for a period, a notional loss or notional taxable income.

Change

The Bill will specifically state that a company can calculate its income in the usual way if it does not have a notional loss for any period in a year.

Explanation

The existing law does not state that a company can work out its taxable income in the usual way if it does not have a notional loss.

It makes no difference to the taxable income of such a company whether it calculates its income in the usual way or under the current year loss provisions. However, it is far easier to calculate taxable income normally.

Clause 165-55 How to attribute deductions to periods

This clause will set out the rules for attributing deductions to periods within a year in which a company:

·
has a change in majority ownership or control; and
·
has not continued the same business.

Change

There will be a single rule that deductions in identified categories (called 'divisible deductions' in the existing law) be attributed to each period in proportion to the length of the period.

Explanation

The existing law has 22 separate statements of rules for attributing divisible deductions to periods - a separate statement for each category of deduction. These statements have complex and varying ways of expressing the notion that the deductions should be allocated according to the length of each period.

Standardising the expression of these rules and avoiding repetition will significantly shorten and simplify the law. Outcomes will not be altered.

Clause 165-60 How to attribute assessable income to periods

This clause will set out the rules for attributing assessable income to periods within a year in which a company changes majority ownership or control, and does not continue the same business.

Change

The categories of assessable income to be apportioned to periods will be reduced, from 8 to 3, and there will be a single rule that assessable income in each category be attributed to each period in proportion to its length.

Explanation

The existing rules, although effectively the same, are separately stated, expressed differently and use unnecessarily complex forms of expression.

Standardising the expression of these rules and avoiding repetition will shorten and simplify the law, make it easier to comply with, but not disturb the outcomes.

Clause 165-65 How to calculate the company's taxable income for the income year

This clause will set out the rules for calculating a company's taxable income for a year in which it:

·
experiences a change in majority ownership or control; and
·
does not continue the same business.

Change

Current year loss companies will calculate the make-up of their taxable income on the same basis as other companies.

Explanation

The existing law requires current year loss companies, in calculating their inter-corporate rebate, to show the order in which they offset deductions against their dividend and other income. The calculations are extremely complex and of limited relevance.

Clause 165-75 How to calculate the company's notional loss or taxable income for a period when the company was a partner

This clause will set out the rules for calculating whether a company has a notional loss or notional taxable income during a period in which it is a partner in a partnership.

Change

The Bill will specifically state that a company can calculate its income in the usual way if it does not have a notional loss for any period in a year.

Explanation

The existing law does not state that a company can work out its taxable income normally if it does not have a notional loss.

If a company does not have a notional loss, it makes no difference to the taxable income of the company whether it calculates its income in the usual way or under the current year loss provisions. However, it is easier to calculate taxable income normally.

Subdivision 165-D Tests for finding out whether the company has maintained the same owners

This Subdivision will set tests for whether a company has maintained majority ownership.

Change

The Bill will have only one set of tests about maintaining majority ownership. These will apply to both current and prior year losses.

Explanation

Under the existing law, the current year and prior year loss provisions have similar, but not identical, tests. By standardising them the law will be shortened and clarified, but not changed in a substantive way.

Clause 165-150 Who has more than 50% of the voting power in the company during a period

Clause 165-155 Who has rights to more than 50% of the company's dividends during a period

Clause 165-160 Who has rights to more than 50% of the company's capital distributions during a period

These clauses will set out the tests of whether a company has maintained majority ownership. They will be known as the primary and alternative tests.

1. Change

The Bill will restructure the primary and alternative tests, so that they will have separate application in respect of each of the rights by which beneficial ownership is measured.

Explanation

Beneficial ownership is measured having regard to:

·
voting power;
·
rights to dividends; and
·
rights to capital distributions.

Under the existing law the primary and alternative tests apply to these matters collectively. The proposal is to restructure the tests so that each matter will have a primary and alternative test.

This will not affect the outcome but will help towards standardisation of the current and prior year losses rules.

2. Change

Where the alternative test is applied under these new provisions, if it is reasonable to assume the test will be satisfied it will be taken to be satisfied.

Explanation

The change will allow the tests to operate on a uniform basis for both current and prior year losses.

Clause 165-165 Rules about the primary test for a condition

This clause is one of a number which clarify, or modify, how the primary and alternative tests apply for identifying continuing majority ownership.

Change

The new law will clearly state that it is not necessary for persons to beneficially own exactly the same shares at all times during a period. What is relevant is the amount of the beneficial ownership.

Explanation

The existing provisions operate to the same effect but the change will make that operation clearer.

Clause 165-180 Arrangements affecting beneficial ownership of shares

This clause will allow the Commissioner to treat a person as not the beneficial owner of shares if the person has entered into a particular arrangement affecting those shares.

Change

For both current and prior year losses, the Commissioner's discretion will depend on whether the arrangement was entered into for the purpose of eliminating or reducing someone's income tax liability.

Explanation

Under the existing law, there is a variation in the description of purpose for which an agreement must have been entered:

·
for current year losses, it is the same as proposed in this clause;
·
for prior year losses, the purpose is expressed as one of enabling a prior year loss to be taken into account.

In the case of prior year losses while the stated purpose has changed the outcome is the same. Because of the arrangement a loss that is not otherwise able to be taken into account is taken into account, so the loss company's tax liability is reduced.

An alternative view is that the arrangement might allow 'new owners' to transfer income from another entity to the loss company. The loss is taken into account by offsetting the transferred income. The entity transferring the loss has its income tax liability reduced by reason of it not having derived that income.

This change allows the provision to operate on a uniform basis for both current and prior year losses.

Subdivision 165-E The same business test

This Subdivision will set out the same business test. If a company fails to maintain majority ownership, or there is a change in its control, it can still deduct a loss if it satisfies the same business test.

Change

The same business test is being standardised to a single test across current and prior year losses.

Explanation

Under the existing law, the current and prior year loss provisions have separate but virtually identical same business tests. Standardising the tests will shorten and simplify the law.

Clause 165-210 The test

This clause will set out the same business test.

Change

The new law will make it clear that the new business test and the new transactions test of the same business test will be triggered if a company derives assessable income from the business or transaction.

Explanation

Under the existing law, the new business test and the new transactions test refer to 'income'. This creates an uncertainty because that term could be taken to mean income according to ordinary concepts, both exempt and assessable. However, in the context of the same business test especially its purpose, the only proper and sensible meaning that can be given to the term is assessable income. This is the existing meaning given to the term as set out in the Taxation Ruling TR95/31 issued by the Commissioner of Taxation.

The change will ensure the law is certain in its application.

Subdivision 170-A Transfer of losses within wholly-owned groups of companies

This Subdivision will allow the transfer of losses between companies that are members of the same wholly owned group of companies.

Change

The conditions that must be satisfied for two companies to be members of the same wholly-owned group have been transferred to the Dictionary (see the discussion in Chapter 11 of this Explanatory Memorandum).

Explanation

The transfer is part of the strategy of standardising concepts that are used in more than one area of the income tax law, so as to avoid repetition.

Clause 170-25 Tax treatment of payment for transferred tax loss

This clause will set out the tax treatment that applies to a payment for a tax loss (known as a subvention payment).

Change

A payment received for the transfer of a loss will be neither assessable income nor exempt income of a loss company.

Explanation

Under the existing law, such a payment is specifically prevented from being income of the payee loss company only where the loss company is a shareholder in the payer income company.

The change removes a potential anomaly by extending the rule to any loss company. It is unlikely that such a receipt would be income of a loss company under ordinary concepts. Even if it were, the receipt should not be assessable to the loss company, as the payment would not be deductible to the income company.

Clause 170-35 The loss company

This clause is one of several that will set out conditions that must be satisfied for a tax loss to be transferred between companies. It contains conditions that must be satisfied by the loss company.

Change

The expression in subclause (2) makes it clear that a company will not be denied the right to transfer a loss in the year the loss was incurred solely because of a change in majority ownership or control of the company in that year. To be denied the right to transfer, it must also be that the company would be prevented from deducting the loss in the year in which it was incurred, by operation of either:

·
the current year loss provisions [Subdivision 165-B] ; or
·
the anti-avoidance provisions [Division 175] .

Explanation

It could be argued under the existing law that the right to transfer a loss in the year in which it was incurred could be denied solely on the basis of a change in majority ownership or control in that year, even though the company continued the same business. The law is not administered in such a restrictive way.

Clause 170-50 Transfer by written agreement

The clause will set out the requirements for an agreement transferring a loss.

Change

The time for making an agreement to transfer a loss has been extended to include the day on which the transferee income company lodges its return of income for the year in which the deduction is claimed.

Explanation

The existing law requires the agreement to be entered into before the date of lodgement. It is usual, in the law, for such deadlines to conclude on or before a particular date.

Use of tax losses or deductions of a company to avoid tax

Division 175 Use of a company's tax losses or deductions to avoid income tax

This Division contains anti-avoidance measures that will allow the Commissioner to reverse the effect of schemes that bring together in the same company:

·
assessable income; and
·
tax losses or current year deductions that wouldn't otherwise be used.

1. Change

The anti-avoidance provisions for current and prior year losses have been collocated.

Explanation

This is a structural change designed to clearly identify anti-avoidance provisions which, in the existing law, are not identified as such and are merged into the current and prior year loss provisions.

2. Change

The Bill will omit an anti-avoidance rule that denies current and prior year deductions if the operations of a company are managed or conducted without paying regard to the rights of the continuing shareholders.

Explanation

The rule is very difficult to apply and little understood. The circumstances it is meant to cover are clearly indicative of either a change of ownership or control, which are dealt with by other provisions.

Clause 175-10 First case: income injected into company because of available tax loss

Clause 175-20 Income injected into company because of available deductions

These clauses will authorise the Commissioner to disallow deductions if assessable income is injected into a company because of the availability of a current or prior year loss.

Change

The new law will make it clear that it is assessable income that must be injected into the company to trigger the application of these provisions.

Explanation

Under the existing law, the income injection tests refer to 'income' being derived because of the availability of the loss. This creates an uncertainty because that term could be taken to mean income according to ordinary concepts, both exempt and assessable. However, in the context of these tests, especially their purpose, the only proper and sensible meaning that can be given to the term is assessable income.

The change will ensure the law is certain in its application.

Clause 175-15 Second case: someone else obtains a tax benefit because of tax loss available to company

Clause 175-30 Someone else obtains a tax benefit because of a deduction or income available to company

These clauses will authorise the Commissioner to disallow deductions if a person other than the company would obtain a tax benefit in connection with a scheme using current or prior year losses.

Change

The term tax benefit , when used in this clause, will have the same meaning as in Part IVA of the Income Tax Assessment Act 1936 .

Explanation

Under the existing law, the current and prior year loss provisions contain their own meaning for the term 'benefit'. This meaning is slightly different from the meaning in Part IVA of the Income Tax Assessment Act 1936 , the general anti-avoidance provision of the income tax law.

Broadly, the existing law states that a person receives a benefit in relation to the application of the income tax law to the extent that the person's income tax liability is reduced because of the scheme.

Under Part IVA a person obtains a tax benefit where:

·
an amount is not included in the person's assessable income and that amount would have been included, or might reasonably be expected to be included but for the scheme; or
·
a deduction is allowable to the person and the whole or part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, but for the scheme.

The effect of this change is to narrow the focus of the benefit to income not being assessed or deductions being allowed. Also, the concept of reasonable expectation has been introduced.

The proposed change will improve consistency throughout the income tax law. Taxpayers will no longer need to take account of slight variations to what is essentially a single concept.

Clause 175-20 Income injected into company because of available deductions

Clause 175-25 Deduction injected into company because of available income

Clause 175-30 Someone else obtains a tax benefit because of a deduction or income available to company

These clauses will set out the anti-avoidance measures that apply to schemes using current year losses.

Change

There will no longer be a first step of dividing an income year into different periods to calculate the current year loss for which a deduction is denied.

Explanation

Under the existing law, the first step in disallowing deductions for current year losses is to divide the income year into periods separated by points in time when;

·
income is injected because there is a loss;
·
deductions are loaded in to absorb income; or
·
a person obtains a benefit because there is a loss or income.

The next step is to calculate a loss or income amount for a period and then to disallow a deduction for any loss. This is achieved through a series of complex calculations.

Under the proposal the same outcome is achieved more simply. The catalysts for denying a deduction - the events set out above - remain the same.

Pooled Development Funds

Clause 195-30 PDF cannot transfer tax loss

This clause will provide that, if a company is a Pooled Development Fund at the end of an income year for which it has a tax loss, it cannot transfer the loss to another company.

Change

This provision is currently situated with other provisions dealing with transfers of tax losses within wholly-owned groups of companies.

Explanation

The provision is only relevant to PDF companies. It is, therefore, more appropriate to relocate it to the Subdivision that specifically deals with PDFs.

Concepts

Subdivision 975-W Wholly-owned groups of companies

This Subdivision will set out the conditions that must be satisfied for two companies to be members of the same wholly-owned group.

Change

The Bill will use the terms members of the same wholly-owned group and 100% subsidiary to replace the terms group company in relation to another company and subsidiary company, which are used in the existing law.

Explanation

The new terms give a more accurate indication of the concepts they embody.

C. Consequential amendments

Inter-corporate dividend rebate [Schedule 1, item 16 of the Income Tax (Consequential Amendments) Bill 1996]

Section 46 of the 1936 Act provides a rebate on dividends paid from one company to another.

Usually, the rebate is calculated by reference to the tax payable on the gross amount of dividends included in a company's taxable income.

However, for companies subject to the current year loss provisions, it is calculated by reference to the net amount of dividends included in their taxable income. Under the existing law this net amount is calculated under section 50N.

It is proposed to close off the Division that section 50N is in, so that it doesn't apply to future years [Schedule 1, item 23] .

Consequently, companies subject to the current year loss provisions will now have to follow the general rule and calculate their dividend rebate by reference to the gross amount of dividends.

This item will omit the provision that makes the exception to the general rule for companies subject to the current year loss provisions.

Dividend stripping [Schedule 1, items 17 to 21 of the Income Tax (Consequential Amendments) Bill 1996]

Section 46A of the 1936 Act deals with rebates on dividends paid from one company to another as part of a dividend stripping arrangement.

Broadly, that rebate is based on the net amount of dividends included in the taxable income of a company. This net amount is calculated by special rules designed to counter the tax advantages created by dividend stripping arrangements.

For companies subject to the current year loss provisions there are further rules. First, the net amount of dividends is calculated by a different provision - section 50N. Secondly, that amount is then modified by section 46A.

It is proposed to close off the Division that section 50N is in, so that it doesn't apply to future years [Schedule 1, item 23] .

Consequently, the rules in section 46A that modify the net amount calculated by section 50N will be omitted.

Also, a new provision will be added providing that the taxable income of companies, both with current year losses and involved in dividend stripping arrangements, will be calculated in the normal way. This amendment will produce the same effect for these companies as the existing law.

Section 63CA [Schedule 1, items 50 and 76 of the Income Tax (Consequential Amendments) Bill 1996]

It is proposed to relocate section 80F (which applies the same business test in some cases where a deduction for bad debts gives rise to a prior year loss), so that it is next to the bad debt provisions. It is presently located immediately after the existing prior year loss provisions which will be closed off. Consequently, it may have been seen as part of the redundant prior year loss provisions and not taken into consideration.

Section 80F now becomes section 63CA.


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