House of Representatives

Explanatory Memorandum

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

Chapter 1 - Consolidation: available fraction for loss utilisation purposes

Outline of chapter

1.1 Schedule 1 to this Bill amends the consolidation provisions in the Income Tax Assessment Act 1997 (ITAA 1997) to ensure the method for calculating the rate at which the head company of a consolidated group can recoup a joining entity's losses operates as intended.

Context of amendments

1.2 On entering consolidation, a joining entity's losses may be transferred to the head company and deducted against the consolidated group's income in future years provided that the normal company loss recoupment tests are satisfied.

1.3 The rate at which the head company of a consolidated group can recoup a joining entity's losses is limited by the available fraction for a bundle of losses of the joining entity. The available fraction is worked out under subsections 707-320(1) and (2) and broadly represents the proportion that the joining entity's market value bears to the market value of the group. Currently, the available fraction for a bundle of losses worked out under subsections 707-320(1) and (2) must be rounded to three decimal places, rounding up if the fourth decimal place is five or more.

1.4 If the available fraction worked out under subsections 707-320(1) and (2) is less than 0.0005, the current rounding rules will result in an available fraction of nil. This may occur if the market value of the joining entity is small relative to the market value of the consolidated group. If the available fraction for a bundle of losses is nil, the head company is effectively prevented from being able to deduct the losses of the joining entity.

1.5 The available fraction was intended to limit the rate of utilisation of losses but not to deny them altogether. This amendment will ensure that the available fraction rules operate as intended.

Summary of new law

1.6 The rounding rules for the available fraction of a joining entity's bundle of losses will be modified to allow rounding to the first non-zero digit if rounding to three decimal places would result in an available fraction of nil.

Comparison of key features of new law and current law

Detailed explanation of new law

1.7 The rounding rules in section 707-320 are amended so that:

•

where rounding to three decimal places does not result in an available fraction of nil, the available fraction will still be rounded to three decimal places, rounding up if the fourth decimal place is five or more; or

•

where rounding to three decimal places does result in an available fraction of nil, the available fraction will be rounded to the first non-zero digit, rounding up if the next digit is five or more.

[Schedule 1, item 1, subsections 707-320(4) and (4A )]

Example 1.1

If the available fraction for a joining entity's bundle of losses worked out under subsections 707-320(1) and (2) is 0.0257, then the available fraction will be rounded to 0.026 - that is, to three decimal places.

Example 1.2

If the available fraction for a joining entity's bundle of losses worked out under subsections 707-320(1) and (2) is 0.000428, then the available fraction will be rounded to 0.0004 - that is, to the first non-zero digit.

Example 1.3

If the available fraction for a joining entity's bundle of losses worked out under subsections 707-320(1) and (2) is 0.0000652, then the available fraction will be rounded to 0.00007 - that is, to the first non-zero digit.

Application and transitional provisions

1.8 This amendment will apply from 1 July 2002, the commencement of the consolidation regime. This amendment removes an unintended consequence and will be advantageous to taxpayers. [Schedule 1, item 2]