Consolidation Reference Manual
You can still refer to the Consolidation reference manual for consolidation information that has not been impacted by changes in the legislation.
C3 Losses
C3-4 Worked example - loss utilisation
Amount that can be utilised
C3-4-420 Amount of transferred losses that can be utilised - exempt income
Description
This example shows how to determine, under the available fraction method, the limits for utilisation of losses transferred to the head company of a consolidated group where the group's income includes exempt income. It also shows how these limits are applied in calculating a group's actual taxable income.
- •
- loss bundles and calculating the available fraction → 'Treatment of losses', C3-1 ; 'Consolidation loss provisions', C3-2-110 (high-level worked example)
Commentary
The available fraction for a loss bundle is applied to each category of group income or gains as reduced by any relevant deductions, including group losses (that is, losses generated by the consolidated group as opposed to transferred losses). The results are taken to be the head company's only income or gains of each type. Based on that assumption, the head company works out the maximum amount of losses of each sort it can use from the loss bundle.
Tax losses must first be deducted against exempt income. Therefore, the available fraction is also applied to a group's exempt income. Transferred tax losses are notionally offset against exempt income (to which the available fraction has been applied, i.e. the available fraction amount of exempt income). Any remaining transferred tax losses are then notionally deducted against assessable income to determine the total limit of transferred tax losses from the bundle that is able to be utilised.
In working out the group's actual taxable income, transferred tax losses can begin to be offset against assessable income once they have been used against the available fraction amount of exempt income.
Example
Facts
A group consolidates on 1 July 2002 and is working out its taxable income for the income year ending 30 June 2003.
The group's transferred losses (all in one bundle with an available fraction of 0.500) are as shown in table 1.
| Table 1: Transferred losses | |
|---|---|
| Sort | Amount ($) |
| Film losses | 100 |
| Tax losses (not film) | 700 |
Table 2 shows the amounts of income generated by the group for the 2003 income year.
| Table 2: Group income 2003 | |
|---|---|
| Income | Amount ($) |
| Assessable film income | 200 |
| Other assessable income | 2,200 (deductions of $200) |
| Net exempt film income | 300 |
| Other net exempt income | 500 |
All the transferred losses are to be utilised using the available fraction method.
The head company satisfies the recoupment tests for the utilisation of all the transferred losses.
Calculation
A. Determine limits for utilisation of transferred losses
Step 1: Work out the categories of group income or gains - subsection 707-310(3)
| Table 3: Categories of group income or gains (step 1) | ||||
|---|---|---|---|---|
|
Column 1 Income or gains |
Gross amount ($) | Less: allowable deductions/ reductions ($) | Less: group/ concessional losses of that kind ($) | Column 2 Income/ gains available for bundle ($) |
| Exempt film income | 300 | - | - | 300 |
| Assessable film income | 200 | - | - | 200 |
| Exempt other income | 500 | - | - | 500 |
| Other assessable income | 2,200 | 200 | - | 2,000 |
Step 2: Calculate the fraction of the income/gains that is attributable to the bundle - subsection 707-310(3)
| Table 4: Fraction of income/gains attributable to the bundle (step 2) | |||
|---|---|---|---|
|
Column 1 Income or gains |
Column 2 Income/gains available for bundle | Multiplied by: available fraction (AF) | AF amount for the bundle |
| Exempt film income | $300 | 0.500 | $150 |
| Assessable film income | $200 | 0.500 | $100 |
| Exempt other income | $500 | 0.500 | $250 |
| Other assessable income | $2,000 | 0.500 | $1,000 |
Step 3: Work out a notional taxable income for the bundle - subsection 707-310(2)
| Table 5: Exempt income (step 3) | |||
|---|---|---|---|
| Exempt income | $ | Deductions | $ |
| Exempt film income | 150 | Transferred film losses | 100 |
| Exempt other income | 250 | Transferred tax losses (not film) | 300 |
| Total | 400 | Total | 400 |
| Table 6: Taxable income (step 3) | |||
|---|---|---|---|
| Assessable income | $ | Deductions | $ |
| Assessable film income | 100 | Transferred film loss | 0 |
| Other assessable income | 1,000 | Transferred tax loss (not film) | 400 |
| Total | 1,100 | Total | 400 |
The (notional) taxable income is $700 ($1,100 - $400).
Transferred losses 'used' in working out notional taxable income for the bundle are:
| • | transferred film losses | $100 | (against exempt film income) |
| • | transferred tax losses (not film) | $300 | (against exempt income) |
| $400 | (against assessable income) |
These are the limits for utilisation of these transferred losses when determining the actual taxable income for the group.
B. Determine group's actual taxable income
| Table 7: Exempt income | |||
|---|---|---|---|
| Exempt income | $ | Deductions | $ |
| Net exempt film income | 300 | Transferred film losses | 100 |
| Other net exempt income | 500 | Transferred tax losses (not film) | 300 |
| Total | 800 | Total | 400 |
Net exempt income remaining is $400 ($800 - $400).
Note that section 707-340 allows transferred tax losses to be deducted against assessable income even though the group has net exempt income remaining.
| Table 8: Taxable income | |||
|---|---|---|---|
| Assessable income | $ | Deductions | $ |
| Assessable film income | 200 | Deductions | 200 |
| Other assessable income | 2,200 | Transferred tax losses (not film) | 400 |
| Total | 2,400 | Total | 600 |
The group's taxable income is $1,800 ($2,400 - $600).
Losses in the bundle remaining as at 30 June 2003 are:
| • | transferred film losses | $100 - $100 = $0 |
| • | transferred tax losses (not film) | $700 - $300 - $400 = $0 |
As there are no losses remaining in the bundle it now ceases to exist (by the operation of subsection 707-315(3)).
References
Income Tax Assessment Act 1997, Subdivision 36-A
Income Tax Assessment Act 1997, sections 707-310, 707-315, 707-340; as amended by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1
Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, Chapter 8
Current at 2 December 2002