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 in a future income year.
These changes apply from a taxpayer's first income year starting on or after 1 July 2008 (the commencement year). For entities with early substituted accounting periods 2009-10 will be the first income year that the changes apply.
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.
See Subdivision 770-A - Transitional foreign losses (common rules) of the Income Tax (Transitional Provisions) Act 1997 [IT(TP)A].
1 Calculate the starting total for your convertible foreign losses
Note
For the 2009-10 income year complete this item only if this is your first income year starting after 1 July 2008. That is if you have an early substituted accounting period. Do not complete this item if you completed it in the 2008-09 income year.
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
- the overall foreign loss was made in one of the most recent 10 income years ending before the commencement year, and
- an overall foreign loss remains after being reduced by certain amounts.
See section 770-5 of the IT(TP)A.
Write 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.
Write at E the loss amount attributable to non-assessable non-exempt income.
Take E away from D and write the result at F.
Write 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 1999-2000 to 2001-02 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 770-15 of the IT(TP)A.
Where the starting total is $10,000 or less, the entity can deduct all convertible foreign losses 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, write 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.
Example 7
At the start of the 2009-10 income year (the commencement year) a company, which has an early balancing 31 December substituted accounting period, has the following amounts of foreign source losses relating to each of the four classes of assessable foreign income that are available to be carried forward to this income year.
Foreign loss related to class of assessable foreign income |
||||
Income year loss was incurred |
Interest |
Modified passive |
Offshore banking |
All other |
1995 |
3,400 |
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2000 |
1,200 |
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2003 |
3,100 |
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2007 |
5,400 |
8,500 |
||
Overall foreign losses for the preceding 10 income years
The company must convert these overall foreign losses into tax losses. However, only overall foreign losses made in any of the most recent 10 income years ending before the commencement year are able to be converted.
The company must disregard the overall foreign loss of $3,400 incurred in 1995 in respect of the interest income class as it was made in an income year ending more than 10 income years before the commencement year.
Overall foreign loss older than seven years, but not more than 10 years
As the overall foreign loss of $1,200 incurred by the company in 2000 was incurred in an income year other than the most recent seven income years ending before the commencement year, half of that loss amount ($600) is included at H.
The company chooses to reduce one or more of the losses so that the starting total equals $10,000.
The company chooses to reduce one or more of its convertible foreign losses so that the starting total equals $10,000.
It includes $7,600 at I and $10,000 at J.
The company completes part E, item 1 on the schedule as follows:
2 Foreign loss component of a tax loss
How to deduct a converted foreign loss
The sum of the convertible foreign losses (converted into a tax loss) for each earlier income year is the starting total for all of those losses taken together (the loss parcel).
An entity that does not apply the $10,000 limit will be subject to special rules on deductibility. The special rules only apply to the component of a tax loss that comprises the convertible foreign loss (the foreign loss component).
The entity divides the starting total for the loss parcel into five equal portions (see section 770-30 of the IT(TP)A). In the commencement year, the entity can use a maximum of one portion of the starting total (subject to the general loss recoupment tests). In each of the next three income years ending after the commencement year the entity can use (subject to general loss rules) a maximum of one portion plus any remaining portion that it was unable to deduct in a prior income year, for example, because it had insufficient assessable income. In the fourth income year ending after the commencement year (and subsequent income years), the entity can deduct any remaining foreign loss component without restriction (subject to the general loss recoupment tests).
Foreign loss component of tax losses deducted
Write at K the foreign loss component of tax losses deducted in this income year.
Include the amount at K, together with other tax losses deducted (if any), at RTax losses deducted item 7 on your Company tax return 2010, or MTax losses deducted item 11 on either your Fund income tax return 2010, or Self-managed superannuation fund annual return.
Foreign loss component of tax losses carried forward
Write at L the foreign loss component of tax losses carried forward to later income years.
Include the amount at L, together with other tax losses carried forward (if any), at UTax losses carried forward to later income years item 13 on your Company tax return 2010, Fund income tax return 2010, Self-managed superannuation fund annual return.
3 Controlled foreign company losses
Controlled foreign companies no longer quarantine revenue losses into separate classes of notional assessable income. However, CFC losses continue to be quarantined in the CFC that incurred them.
The amounts at M, N and O are the totals of the entity's share of losses incurred by CFCs. The entity's share of a loss of a CFC is calculated by applying its attribution percentage in the CFC to the loss of the CFC.
Convertible CFC losses
Under the transitional rules, a CFC is required to convert losses from the four classes of notional assessable income for each earlier statutory accounting period that have not yet been taken into account in one loss bundle.
An eligible CFC will have a convertible CFC loss for an earlier statutory accounting period if:
- it has an unrecouped loss under section 426 of the ITAA 1936 for the earlier period in relation to notional assessable income of a particular class
- the loss was made in one of the 10 most recent statutory accounting periods ending before the commencement period (which is the first statutory accounting period starting on or after 1 July 2008), and
- a loss remains after being reduced by certain amounts.
See sections 770-165 and 770-170 of the IT(TP)A.
Write at M the total of the entity's share of convertible CFC losses for the earlier statutory accounting periods.
CFC losses deducted
Write at N the total of the entity's share of CFC losses (including convertible CFC losses), if any, that have been claimed as notional allowable deductions in calculating the CFC's attributable income for the statutory accounting period that ends within the 2009-10 income year.
CFC losses carried forward
Write at O the total amount of the entity's share of un-deducted CFC losses, if any, that are available to be carried forward to statutory accounting periods that end in later income years.