Consolidation Reference Manual
You can still refer to the Consolidation reference manual for consolidation information that has not been impacted by changes in the legislation.
C3 Losses
C3-4 Worked example - loss utilisation
Utilisation - special circumstances
C3-4-510 Transferred loss utilisation using value donor concession with transferred foreign losses
Description
This example shows how to determine, under the available fraction method, the limits for utilisation of losses transferred to the head company of a consolidated group. It also shows how the value donor concession is applied and how to treat foreign losses.
- •
- loss bundles and calculating the available fraction → 'Treatment of losses', C3-1 ; 'Consolidation loss provisions', C3-2-110 (high-level worked example)
- •
- working out modified market value → 'Modified market value of a single joining entity', C3-4-110 (worked example)
- •
- market values → 'Market valuation guidelines', C4-1
- •
- the value donor concession → 'Adding to modified market value to reflect loss transferability', C3-4-210
- •
- excluding entities with unrecouped foreign losses → worked example 'Transitional foreign loss makers' C3-4-550
Commentary
The available fraction for a loss bundle is applied to each category of group income or gains as reduced by any relevant deductions, including group losses (that is, losses generated by the consolidated group as opposed to transferred losses). The results are taken to be the head company's only income or gains of each type. Based on that assumption, the head company works out the maximum amount of losses of each sort it can use from the loss bundle.
Under the transitional value donor concession, a loss entity (the 'real loss-maker'), in calculating its available fraction, may add to its modified market value the modified market value of another company (the 'value donor'). This concession is set out in Subdivision 707-C of the Income Tax (Transitional Provisions) Act 1997 .
This value donor concession has effect for working out the available fraction of a bundle of losses only so far as it affects the utilisation of a tax loss, film loss or net capital loss. It does not affect the utilisation of an overall foreign loss. The available fraction for a foreign loss in either the real loss-maker's bundle or the value donor's bundle is unaffected. This means the available fractions for the real loss-maker's and value donor's foreign losses are what they would have been had value not been donated.
Example
Facts
Assume the consolidated group structure as at the joining time (1 July 2002) as shown in Figure 1.
ACo and BCo have been wholly owned by HCo since incorporation - both ACo and BCo are eligible to transfer tax losses to HCo under Division 170 group loss transfer provisions. The group's transferred losses are shown in table 1.
The consolidated group is working out its taxable income for the 2003 income year. Its income and gains for 2003 are shown in table 2.
Figure 1: Consolidated group at joining time (1 July 2002)
| Loss bundle | Amount ($) | Sort |
|---|---|---|
| A | 1,000 | Tax loss (not film) |
| A | 300 | Foreign loss |
| B | 500 | Tax loss (not film) |
| B | 200 | Foreign loss |
| Income/gains | Amount ($) |
|---|---|
| Assessable foreign income | 600 (deductions are nil) |
| Other assessable income | 1,000 (deductions are nil) |
Both of the transferred foreign losses are in respect of the same class of assessable foreign income that was derived in the 2003 income year.
All the transferred losses are to be utilised using the available fraction method.
The head company satisfies the recoupment tests for the utilisation of all the transferred losses.
Under the value donor concession, HCo chooses to:
- (a)
- add 50% of HCo's modified market value to ACo in calculating the available fraction for ACo's loss bundle; and
- (b)
- add 50% of HCo's modified market value to BCo in calculating the available fraction for BCo's loss bundle.
Assume that, where applicable, HCo makes an election under section 79DA of the ITAA 1936 to deduct transferred tax losses against assessable foreign income.
Calculation
1. Applying the value donor concession
Adding modified market value to ACo:
- •
- ACo's transferred losses (not foreign loss) are transferable to HCo. 50% of HCo's modified market value is added to ACo's.
- •
- As a result, ACo's available fraction (AF) is:
- (400 + [0.5 * 400]) / 1,000 = 0.6
Adding modified market value to BCo:
- •
- BCo's transferred losses (not foreign loss) are transferable to HCo. 50% of HCo's modified market value is added to BCo's.
- •
- As a result, BCo's available fraction (AF) is:
- (200 + [0.5 * 400]) / 1,000 = 0.4
In determining the limit for utilising transferred losses, other than foreign losses, the available fractions to be used are 0.6 for bundle A and 0.4 for bundle B. In this example there are only transferred tax losses that have limits determined using these available fractions.
The available fractions to be used to determine the limit for utilising transferred foreign losses are determined on the basis that the modified market value is not donated. These available fractions are 0.4 for bundle A (i.e. 400/1,000) and 0.2 for bundle B (i.e. 200/1,000).
2. Determine limits for utilisation of transferred tax losses
Step 1: Work out the categories of group income or gains - subsection 707-310(3)
| Column 1
Income or gains |
Gross amount | Less: allowable deductions / reductions | Less: group / concessional losses of that kind | Column 2
Income / gains available for bundle |
|---|---|---|---|---|
| Assessable foreign income | $ 600 | - | - | $ 600 |
| Other assessable income | $1,000 | - | - | $1,000 |
Step 2: Calculate the fraction of the income/gains that is attributable to each bundle - subsection 707-310(3)
| Column 1
income or gains |
Loss bundle | Column 2
income/gains available for bundle |
Multiplied by:
available fraction (AF) |
AF amount for the bundle |
|---|---|---|---|---|
| Assessable foreign income | Bundle A | $600 | 0.6 | $360 |
| Assessable foreign income | Bundle B | $600 | 0.4 | $240 |
| Other assessable income | Bundle A | $1,000 | 0.6 | $600 |
| Other assessable income | Bundle B | $1,000 | 0.4 | $400 |
Step 3(a): Work out a notional taxable income for bundle A - subsection 707-310(2)
| Foreign income | $ | Losses applied | $ |
|---|---|---|---|
| Assessable foreign income | 360 | Transferred foreign loss | 300 |
| Total | 360 | Total | 300 |
The (notional) assessable foreign income is $60 ($360 - $300).
| Assessable income | $ | Deductions | $ |
|---|---|---|---|
| Assessable foreign income | 60 | Transferred tax loss | 660 |
| Other assessable income | 600 | ||
| Total | 660 | Total | 660 |
The notional taxable income is nil ($660 - $660).
The utilisation of bundle A's transferred tax loss in step 3 in determining the relevant notional taxable income is as follows:
- •
- transferred tax loss $660
This is the limit for utilisation of this transferred loss when determining the actual taxable income for the group.
Step 3(b): Work out a notional taxable income for bundle B - subsection 707-310(2)
| Foreign income | $ | Losses applied | $ |
|---|---|---|---|
| Assessable foreign income | 240 | Transferred foreign loss | 200 |
| Total | 240 | Total | 200 |
The (notional) assessable foreign income is $40 ($240 - $200)
| Assessable income | $ | Deductions | $ |
|---|---|---|---|
| Assessable foreign income | 40 | Transferred tax loss | 440 |
| Other assessable income | 400 | ||
| Total | 440 | Total | 440 |
The (notional) taxable income is nil ($440 - $440)
The utilisation of bundle B's transferred tax loss in step 3 in determining the relevant notional taxable income is as follows:
- •
- transferred tax loss $440
This is the limit for utilisation of this transferred loss when determining the actual taxable income for the group.
3. Determine limits for utilisation of transferred foreign losses
Step 1: Work out the categories of group income or gains - subsection 707-310(3)
| Column 1
income or gains |
Gross amount | Less:
allowable deductions / reductions |
Less:
group / concessional losses of that kind |
Column 2 income / gains available for bundle |
|---|---|---|---|---|
| Assessable foreign income | $600 | - | - | $600 |
| Other assessable income | $1,000 | - | - | $1,000 |
Step 2: Calculate the fraction of the income/gains that is attributable to each bundle - subsection 707-310(3)
| Column 1
income or gains |
Loss bundle | Column 2
income/gains available for bundle |
Multiplied by:
available fraction (AF) |
AF amount for the bundle |
|---|---|---|---|---|
| Assessable foreign income | Bundle A | $600 | 0.4 | $240 |
| Assessable foreign income | Bundle B | $600 | 0.2 | $120 |
| Other assessable income | Bundle A | $1,000 | 0.4 | $400 |
| Other assessable income | Bundle B | $1,000 | 0.2 | $200 |
Step 3(a): Work out a notional taxable income for bundle A - subsection 707-310(2)
| Foreign income | $ | Losses applied | $ |
|---|---|---|---|
| Assessable foreign income | 240 | Transferred foreign loss | 240 |
| Total | 240 | Total | 240 |
The (notional) assessable foreign income is nil ($240 - $240).
The calculation of notional taxable income is not necessary in this instance because foreign losses can only be utilised against assessable foreign income.
The utilisation of bundle A's transferred foreign loss in step 3 is as follows:
- •
- transferred foreign loss $240
This is the limit for utilisation of this transferred loss when determining the actual taxable income for the group.
Step 3(b): Work out a notional taxable income for bundle B - subsection 707-310(2)
| Foreign income | $ | Losses applied | $ |
|---|---|---|---|
| Assessable foreign income | 120 | Transferred foreign loss | 120 |
| Total | 120 | Total | 120 |
The (notional) assessable foreign income is nil ($120 - $120).
The calculation of notional taxable income is not necessary in this instance because foreign losses can only be utilised against assessable foreign income.
The utilisation of bundle B's transferred foreign loss in step 3 is as follows:
- •
- transferred foreign loss $120
This is the limit for utilisation of this transferred loss when determining the actual taxable income for the group.
4. Determine group's actual taxable income
| Foreign income | $ | Losses applied | $ |
|---|---|---|---|
| Assessable foreign income | 600 | Transferred foreign loss (bundle A) | 240 |
| Transferred foreign loss (bundle B) | 120 | ||
| Total | 600 | Total | 360 |
The group's assessable foreign income is $240 ($600 - $360).
| Assessable income | $ | Deductions | $ |
|---|---|---|---|
| Assessable foreign income | 240 | ||
| Other Assessable income | 1,000 | Transferred foreign loss - (bundle A) | 660 |
| Transferred foreign loss - (bundle B) | 440 | ||
| Total | 1,240 | Total | 1,100 |
The group's taxable income is $140 ($1,240 - $1,100).
Transferred losses that are carried forward are:
| • transferred foreign loss (bundle A) | $60 |
| • transferred foreign loss (bundle B) | $80 |
| • transferred tax loss (bundle A) | $340 |
| • transferred tax loss (bundle B) | $60 |
References
Income Tax Assessment Act 1997, Division 170
Income Tax Assessment Act 1997, Subdivision 707-C; as amended by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1
Income Tax (Transitional Provisions) Act 1997, Subdivision 707-C; as amended by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 2
Income Tax (Transitional Provisions) Act 1997 , Division 701D ; as inserted by Taxation Laws Amendment Act No. 1, 2004 (No. 101 of 2004)
Income Tax Assessment Act 1997 , subsection 713-225(6A) ; as inserted by Tax Laws Amendment (2004 Measures No. 2) Act 2004 (No. 83 of 2004), Schedule 2, Part 5
Explanatory Memorandum to Tax Laws Amendment (2004 Measures No. 2 ) Bill 2004, paragraphs 2.61 - 2.62
History
Revision History
Section C3-4-510 first published 2 December 2002
Further revisions are described below.
| Date | Amendment | Reason |
|---|---|---|
| 14.7.04 | Note on recent and proposed changes to consolidation rules | Recent and proposed legislative amendments. |
| 26.10.05 | Reference to entities with unrecouped foreign losses, p. 1, removal of note on recent and proposed changes to consolidation rules. | Legislative amendments. |
Proposed changes to consolidation
Proposed changes to consolidation announced by the Government are not incorporated into the Consolidation reference manual until they become law.
In the interim, information about such changes can be viewed at:
- •
- http://assistant treasurer.gov.au (Assistant Treasurer's press releases)
- •
- www.treasury.gov.au (Treasury papers on refinements to the consolidation regime).
Current at 26 October 2005