In working out the notional deductions of the FIF, sections 429 and 431 of Part X of the ITAA 1936 are ignored [paragraph 559A(4)(a)].
The effect of disregarding these sections is that the main operative provisions in Part X of the ITAA 1936 will not apply in relation to the FIF. There will be no need to calculate the sometimes-exempt-income gain or loss because the provisions where those calculations apply (sections 429 and 431) are disregarded in working out the notional allowable deductions of the FIF.
Instead, notional deductions (if any) as worked out under section 572 are included in working out the FIF's notional allowable deductions. Section 572 deals with notional deductions for calculated losses for prior periods.
Where a taxpayer makes a choice to work out the notional income and deductions of a FIF using the CFC rules a calculated loss may arise in respect of that FIF (ie. where the notional allowable deductions exceed notional assessable income) under subsection 559(4) of the ITAA 1936. This loss feeds into section 572 of that Act which provides its own rules for working out the amount of past calculated losses that are treated as notional deductions under section 559(2) in determining the FIF income that accrues to a taxpayer in relation to a future income year.
Section 578 of the ITAA 1936 ensures that any calculated loss of a second-tier FIF as determined by section 572 will be taken into account in determining the notional deductions of the second-tier FIF. [subsection 559A(6) and paragraph 559A(4)(b)]