Tax Law Improvement Act (No. 1) 1998 (46 of 1998)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

2   Section 165-90 (link note)

Repeal the link note, substitute:

Subdivision 165-CA - Applying net capital losses of earlier income years

Guide to Subdivision 165-CA

165-93 What this Subdivision is about

In working out its net capital gain for an income year, a company cannot apply a net capital loss for an earlier income year unless:

it has the same owners and the same control throughout the loss year and the income year; or

it carried on the same business, entered no new kinds of transactions and conducted no new kinds of business.

Table of sections

Operative provisions

165-96 When a company cannot apply a net capital loss

[This is the end of the Guide.]

Operative provisions

165-96 When a company cannot apply a net capital loss

(1) In working out its *net capital gain or *net capital loss for the *current year, a company cannot apply a *net capital loss it has for an earlier income year if Subdivision 165-A would prevent it from deducting the loss for the current year if:

(a) the loss were a *tax loss of the company for that earlier income year; and

(b) section 165-20 (about deducting part of a tax loss) were disregarded.

Note 1: A company's net capital gain or net capital loss for an income year is usually worked out under section 102-5.

Note 2: Subdivision 165-A deals with the deductibility of a company's tax loss for an earlier income year if there has been a change in the ownership or control of the company in the loss year or the income year.

(2) If subsection (1) prevents the company from applying the *net capital loss, it can apply the part of the loss that it made during a part of that earlier income year, but only if, assuming that part of that income year had been treated as the whole of it, the company would have been entitled to apply the net capital loss.

Subdivision 165-CB - Working out the net capital gain and the net capital loss for the income year of the change

Guide to Subdivision 165-CB

165-99 What this Subdivision is about

A company that has not had the same ownership and control during the income year, and has not satisfied the same business test, works out its net capital gain and net capital loss under this Subdivision.

Table of sections

When a company must work out its net capital gain and net capital loss under this Subdivision

165-102 On a change of ownership, or of control of voting power, unless the company carries on the same business

Working out the company's net capital gain and net capital loss

165-105 First, divide the income year into periods

165-108 Next, calculate the notional net capital gain or notional net capital loss for each period

165-111 How to work out the company's net capital gain

165-114 How to work out the company's net capital loss

[This is the end of the Guide.]

When a company must work out its net capital gain and net capital loss under this Subdivision

165-102 On a change of ownership, or of control of voting power, unless the company carries on the same business

A company must calculate its *net capital gain and *net capital loss for the income year under this Subdivision if:

(a) it must calculate its taxable income and *tax loss for the income year under Subdivision 165-B; or

(b) it would be required to calculate them under that Subdivision but for subsection 165-50(3) (about cases where that Subdivision would make no difference to the taxable income).

Note: In the case of a listed public company or its 100% subsidiary, Subdivision 166-B modifies how this Subdivision applies, unless the company chooses otherwise.

Working out the company's net capital gain and net capital loss

165-105 First, divide the income year into periods

Divide the income year into periods according to section 165-45 (which is about working out the company's taxable income under Subdivision 165-B).

165-108 Next, calculate the notional net capital gain or notional net capital loss for each period

(1) The company has a notional net capital gain for a period if the total of the *capital gains it made during the period exceeds the total of the *capital losses it made during the period. The notional net capital gain is the amount of the excess.

(2) On the other hand, if the total of those losses exceeds the total of those gains, the company has a notional net capital loss for the period, equal to the excess.

(3) If the company has a *notional net capital loss for none of the periods in the income year, this Subdivision has no further application, and the company's *net capital gain for the income year is calculated in the usual way.

The usual way of working out the net capital gain is set out in section 102-5.

Trust's capital gain attributed to company beneficiary

(4) If some or all (the attributable amount) of an amount included in the company's assessable income for the income year under:

(a) section 97 (Beneficiary of a trust estate who is not under a legal disability) of the Income Tax Assessment Act 1936; or

(b) section 98A (Non-resident beneficiaries assessable in respect of certain income) of that Act;

is attributable to a *capital gain that the trust made at a particular time during the period, this section applies to the attributable amount as if it were a *capital gain made by the company at that time.

165-111 How to work out the company's net capital gain

The company's net capital gain for the income year is worked out in this way:

Working out the company's net capital gain

Step 1. Add up the *notional net capital gains (if any) worked out under section 165-108.

Note: A notional net capital loss for a period is not taken into account, but counts towards the company's net capital loss for the income year.

Step 2. Add to the Step 1 amount so much of each amount included in the company's assessable income for the income year under:

(a) section 97 (Beneficiary of a trust estate who is not under a legal disability) of the Income Tax Assessment Act 1936; or

(b) section 98A (Non-resident beneficiaries assessable in respect of certain income) of that Act;

as is attributable to a *capital gain that the trust made outside the income year.

Note: This is relevant only if the trust has an income year that starts and ends at a different time from when the company's income year starts and ends.

Step 3. If the Step 2 amount is more than zero, reduce it by applying any unapplied *net capital losses from previous income years. (If this reduces it to zero, the company has no net capital gain for the income year.)

Note: To apply net capital losses: see section 102-15.

Step 4. If the Step 3 amount is more than zero, it is the company's net capital gain.

Note : For exceptions and modifications to these rules: see section 102-30.

165-114 How to work out the company's net capital loss

The company's net capital loss for the income year is worked out in this way:

Working out the company's net capital loss

Step 1. Add up the *notional net capital losses (if any) worked out under section 165-108.

Step 2. If the Step 1 amount is more than zero, it is the company's net capital loss.

Note 1: The net capital loss can be applied against the company's capital gains for a later income year: see sections 102-5 and 102-15.

Note 2: For exceptions and modifications to these rules: see section 102-30.

Subdivision 165-C - Deducting bad debts

Guide to Subdivision 165-C

165-117 What this Subdivision is about

A company cannot deduct a bad debt unless:

if the debt was incurred in an earlier income year - the company had the same owners and the same control during the rest of that income year and also during the income year in which it writes off the debt as bad; or

• if the debt was incurred in the current year - the company had the same owners and the same control during the income year both before and after the debt was incurred;

or, if there has been a change of ownership or control, the company has since carried on the same business, entered no new kinds of transactions and conducted no new kinds of business.

Table of sections

Operative provisions

165-120 To deduct a bad debt

165-123 Company must maintain the same owners

165-126 Alternatively, company must carry on same business

165-129 Same people must control the voting power, or company must carry on same business

165-132 When tax losses resulting from bad debts cannot be deducted

Operative provisions

165-120 To deduct a bad debt

(1) A company cannot deduct a debt (or part of a debt) that it writes off as bad in the *current year unless:

(a) it meets the conditions in section 165-123 (which is about the company maintaining the same owners); or

(b) the Commissioner thinks it would be unreasonable to require the company to meet the conditions in that section, having regard to the entities that beneficially owned the shares in the company when (in the Commissioner's opinion) the debt (or part) became bad; or

(c) the company meets the conditions in section 165-126 (which is about the company carrying on the same business).

Note 1: In the case of a listed public company or its 100% subsidiary, Subdivision 166-C modifies how this Subdivision applies, unless the company chooses otherwise.

Note 2: Normally bad debts are deductible under section 8-1 or 25-35.

(2) The conditions in section 165-123 or 165-126 apply to different periods, depending on whether the debt was incurred in the *current year or an earlier income year:

(3) A company cannot deduct a debt (or part of a debt) that it writes off as bad on the last day of the *current year if the debt was also incurred on that day.

165-123 Company must maintain the same owners

Voting power

(1) There must be persons who had *more than 50% of the voting power in the company during the whole of the *first continuity period. Also, those persons must have had *more than 50% of the voting power in the company during the whole of the *second continuity period.

See section 165-150 to work out who had more than 50% of the voting power.

Rights to dividends

(2) There must be persons who had rights to *more than 50% of the company's dividends during the whole of the *first continuity period. Also, those persons must have had rights to *more than 50% of the company's dividends during the whole of the *second continuity period.

See section 165-155 to work out who had rights to more than 50% of the company's dividends.

Rights to capital distributions

(3) There must be persons who had rights to *more than 50% of the company's capital distributions during the whole of the *first continuity period. Also, those persons must have had rights to *more than 50% of the company's capital distributions during the whole of the *second continuity period.

See section 165-160 to work out who had rights to more than 50% of the company's capital distributions.

When to apply the primary test

(4) To work out whether a condition in this section was satisfied during a period (the ownership test period) that is:

(a) the *first continuity period; or

(b) the *second continuity period;

apply the primary test for that condition unless subsection (5) requires the alternative test to be applied.

For the primary test: see subsections 165-150(1), 165-155(1)
and 165-160(1).

When to apply the alternative test

(5) Apply the alternative test for that condition if one or more other companies beneficially owned *shares, or interests in shares, in the company at any time during the *first continuity period or the *second continuity period.

For the alternative test: see subsections 165-150(2), 165-155(2)
and 165-160(2).

Applying the tests for the purposes of this Subdivision

(6) In applying a test for the purposes of this Subdivision, subsection 165-180(2) and sections 165-185 and 165-190 have effect as if they referred to the *second continuity period instead of the income year.

165-126 Alternatively, company must carry on same business

(1) If the company fails to meet a condition in section 165-123 (which is about the company maintaining the same owners), it can instead meet the conditions in this section.

(2) There must be some period (the minimum continuity period) that satisfies these conditions:

(a) it must start at the start of the *first continuity period (and end before, at or after the end of that period);

(b) if the minimum continuity period were the first continuity period, each of the conditions in section 165-123 about the first continuity period would be satisfied.

(3) The company must satisfy the *same business test for the *second continuity period (the same business test period). Apply the test to the *business that the company carried on immediately before the time (the test time) when the *minimum continuity period ends.

For the same business test: see Subdivision 165-E.

165-129 Same people must control the voting power, or company must carry on same business

(1) Even if section 165-120 does not prevent a company from deducting a bad debt (or part of one), it cannot deduct the bad debt (or that part of it) if:

(a) for some or all of the *second continuity period, a person controlled, or was able to control, the voting power in the company (whether directly, or indirectly through one or more interposed entities); and

(b) for some or all of the *first continuity period, that person did not control, and was not able to control, that voting power (directly, or indirectly in that way); and

(c) that person began to control, or became able to control, that voting power (directly, or indirectly in that way) for the purpose of:

(i) getting some benefit or advantage in relation to how this Act applies; or

(ii) getting such a benefit or advantage for someone else;

or for purposes including that purpose.

(2) However, that person's control of the voting power, or ability to control it, does not prevent the company from deducting the bad debt (or that part of it) if the company satisfies the *same business test for the *second continuity period (the same business test period).

(3) Apply the *same business test to the *business that the company carried on immediately before the time (the test time) when the person began to control that voting power, or became able to control it.

For the same business test: see Subdivision 165-E.

165-132 When tax losses resulting from bad debts cannot be deducted

(1) If:

(a) a company can deduct a debt (or part of a debt) that it wrote off as bad in an income year; and

(b) because the company failed to meet a condition in section 165-123 (about the company maintaining the same owners), it could not have deducted the debt (or part) apart from section 165-126 (about the company carrying on the same business); and

(c) the company wrote off the debt after the *minimum continuity period; and

(d) because of the deduction, the company has a *tax loss for that income year, or there was an increase in the amount of its *tax loss for that income year; and

(e) the company carried on a *business during that income year for the purpose, or for purposes including the purpose, of securing a deduction for the debt (or part) by relying on section 165-126;

the company cannot deduct the *tax loss for a later income year, or cannot deduct it to the extent of the increase, unless it also satisfies the *same business test for the later income year (the same business test period).

(2) Apply the test to the *business that the company carried on immediately before the time (the test time) when the *minimum continuity period ended.

For the same business test: see Subdivision 165-E.