Page 3 of the schedule

Part E Foreign source losses

Foreign losses are no longer quarantined from domestic assessable income (or from assessable foreign income of a different class). Resident taxpayers also are no longer required to make an election to deduct domestic tax losses against assessable foreign income. Therefore, in utilising deductions, no distinction is made in respect of the source of the assessable income, whether foreign or domestic. A taxpayer will now combine both foreign and domestic deductions. Where the deductions exceed assessable income and net exempt income from all sources, the excess will be a tax loss and can potentially be deducted from assessable income of a future income year.

These changes apply from a taxpayer's first income year starting on or after 1 July 2008 (the commencement year). Entities with early substituted accounting periods do not need to fill out this part of the schedule as these changes do not apply to early balancers until their 2010 income year.

Prior year overall foreign losses that exist at the beginning of the commencement year will be subject to transitional rules. Generally, overall foreign losses in respect of the four former classes of assessable foreign income for each earlier income year will be grouped together and converted into a tax loss. The converted loss will be known as the foreign loss component of a tax loss. Utilisation of the foreign loss component of a tax loss will be restricted for the first four years (the commencement year and the three subsequent income years). After this transitional period, any remaining undeducted tax loss will be subject to the ordinary loss utilisation rules.

Section 1 Calculate the starting total for your convertible foreign losses

What is a convertible foreign loss?

Taxpayers are required to convert any overall foreign loss of a particular class of assessable foreign income that has not yet been utilised (under former section 160AFD of the ITAA 1936) into a tax loss.

A taxpayer is not required to satisfy the general loss recoupment tests when converting an overall foreign loss of a particular class into a tax loss. Rather, a taxpayer will need to satisfy these tests when they seek to deduct the loss from assessable income in the commencement year or a subsequent year of income.

A taxpayer will have a convertible foreign loss for an earlier income year if:

• they have an unrecouped overall foreign loss in respect of a class of assessable income (within the meaning of former section 160AFD of the ITAA 1936) for that earlier income year; and
• the overall foreign loss was made in one of the most recent 10 income years ending before the commencement year. For example, for an entity with a 30 June balance date, this means overall foreign losses that were incurred in the 1998–99 to 2007–08 income years; and
• an overall foreign loss remains after being reduced by certain amounts.

See section 770-5External Link of the IT(TP)A.

Show at A, B, C and D the total amount of unrecouped overall foreign losses for each of the four classes of assessable foreign income made in any of the most recent 10 income years ending before the commencement year. Exclude losses of controlled foreign companies.

Calculating a convertible foreign loss

Each overall foreign loss, made in any of the most recent 10 income years, in respect of a class of assessable foreign income is reduced as follows:

Step 1

If the entity is a company and the relevant class of assessable foreign income is the 'all other assessable income' class - reduce the unrecouped overall foreign loss for that class to the extent (if any) that the loss is attributable to losses or outgoings incurred in gaining or producing income of a kind that would be the company's non-assessable non-exempt income if it were gained or produced in the commencement year.

Show at E the loss amount attributable to non assessable non exempt income.

Subtract E from D and show the result at F.

Show the total of A, B, C and F at G.

Step 2

Step 2 requires a taxpayer with an overall foreign loss that was incurred more than seven income years, but not more than 10 income years, ending before the commencement year (when measured from the first income year starting on or after 1 July 2008), to halve the loss that remains after step 1.

Include at H 50% of the losses at G that were incurred for the 1998–99 to 2000–01 income years.

The amount remaining when the losses at H are subtracted from the losses at G is the amount of the convertible foreign losses for all of the relevant earlier income years. This is also known as the starting total.

Where an entity's starting total is $10,000 or less, no special deductibility rules are applicable. Further, where an entity has a starting total of more than $10,000, the entity may choose to reduce one or more of their convertible foreign losses so that the starting total equals $10,000. In that case too, no special deductibility rules would apply, but the excess of the starting total over $10,000 would never be deductible.

See section 770-15External Link of the IT(TP)A.

Where the starting total is $10,000 or less, the entity can deduct the entire convertible foreign loss at the end of the commencement year (provided it has sufficient assessable income and the general loss recoupment tests are satisfied).

If the entity chooses to reduce one or more of their convertible foreign losses such that their starting total equals $10,000, show at I the amount by which the convertible foreign losses are reduced.

The amount at J equals the total at G less any amounts at H and I.