Consolidation Reference Manual

C3 Losses

C3-5 Transfer tax losses

C3-5-110 Transfer of subsidiary member tax losses under Subdivision 170-A - consolidation part-way through the head company's income year

Description

This example shows how, in situations where a consolidated group forms part-way through the head company's income year, a prior year tax loss and a non-membership period tax loss of a subsidiary member may be transferred to another eligible subsidiary member under Subdivision 170-A of the Income Tax Assessment Act 1997 (ITAA 1997). The example also illustrates that the balance of a subsidiary member's tax losses are transferred ^[F1] to the head company under Subdivision 707-A of the ITAA 1997 and hence cannot be transferred to the head company under Subdivision 170-A.

Commentary

The date on which Subdivision 170-A tax loss transfers effectively cease for a particular company depends on:

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whether the company becomes a subsidiary member of a consolidated group, and

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whether the head company of the group chooses to consolidate on the first day of its income year, or on a day during its income year.

If a head company chooses to form a group part-way through its income year, subsidiary members of the group will have a non-membership period ^[F2] for that part of the income year prior to consolidation. Where consolidation occurs on or before 1 July 2003 - with an extension for consolidated groups with a substituted accounting period (SAP) that consolidate on the first day of their next income year after 1 July 2003 - subsidiary members retain unapportioned access to Subdivision 170-A tax loss transfers for the non-membership period prior to the joining time.

This means:

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a prior year tax loss incurred by a subsidiary member may be transferred and deducted against income derived by another subsidiary member in its non-membership period, and

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a tax loss incurred by a subsidiary member in its non-membership period may be transferred and deducted against income derived by another subsidiary member in its non-membership period.

Where necessary, tax loss limits and income limits are required to be apportioned in accordance with provisions contained in item 39 of Schedule 3 to the New Business Tax System (Consolidation) Act (No. 1) 2002. This may be necessary, for example, where a group with a SAP consolidates after 1 July 2003 but not on the first day of its next income year.

Example

Facts

A consolidatable group consists of HCo and subsidiaries ACo and BCo. All members of the group have an early balancing SAP of 1 January - 31 December. HCo chooses to consolidate the group on 1 September 2003.

As the group consolidates after 1 July 2003 but not on 1 January 2004 (the first day of the head company's next income year), the subsidiary members effectively retain access to Subdivision 170-A tax loss transfers for the period 1 January 2003 - 30 June 2003.

ACo incurs a $30 tax loss in its non-membership period prior to joining the consolidated group. ACo also has a prior year tax loss of $70 that it has carried forward from a previous income year.

BCo generates $200 of assessable income and incurs $50 of deductions in its non-membership period prior to joining the consolidated group. ^[F3]

Tax loss transfers under Subdivision 170-A from ACo to BCo are to be made to the maximum extent possible.

These facts are represented in Figure 1.

Figure 1: Group consolidation part-way through income year

Calculation

For each tax loss the maximum amount transferable is determined under section 170-45. Then, if necessary, the maximum amount must be apportioned by item 39 into pre and post consolidation amounts.

Loss limit

ACo is able to transfer all of the prior year tax loss. ACo can also transfer the portion of the non-membership period tax loss referable to the pre-1 July 2003 period.

The loss limit amount is determined under subsection 170-45(1):

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the prior year tax loss is $70, and

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the non-membership period tax loss is $30.

As the non-membership period tax loss is a tax loss made for the final year, it must be apportioned based on the number of days before the apportioning day. ^[F4] In this example there are 243 days in the non-membership period, of which 181 are before the apportioning day of 1 July 2003.

$30 × (181 / 243) = $22


Income limit

BCo has $200 of assessable income and $50 of deductions in the non-membership period. For the prior year tax loss the maximum amount transferable to BCo under subsection 170-45(2) is:

$200 - $50 = $150


Subitem 39(6) apportions this Figure based on the number of days before the apportioning day:

$150 × (181 / 243) = $112


By agreement, ACo transfers $70 (being the lesser of the loss limit and the income limit) of its prior year tax loss to BCo in respect of its apportioned non-membership period income.

The maximum amount transferable under subsection 170-45(2) in respect of the non-membership period tax loss is:

$200 - $50 - $70 = $80


Subitem 39(6) apportions this Figure based on the number of days before the apportioning day:

$80 × (181 / 243) = $60


By agreement, ACo transfers $22 (being the lesser of the loss limit and the income limit) of its non-membership period tax loss to BCo in respect of its apportioned non-membership period income.

The $8 non-membership period tax loss remaining is then transferred to HCo on 1 September 2003 under Subdivision 707-A. The transferred tax loss must be subsequently utilised by HCo for the 2004 income year and later income years using the provisions contained in Subdivision 707-C. For an example illustrating the utilisation of transferred losses → 'Amount of transferred losses that can be utilised', C3-4-410 .

Provided there are no other tax losses transferred to BCo under Subdivision 170-A, BCo will lodge a 2004 income tax return declaring $58 ^[F5] of taxable income.

References

Income Tax Assessment Act 1997, subsections 701-30(8) & (9); as amended by New Business Tax System (Consolidation and Other Measures) Act 2003 (No. 16 of 2003), Schedule 19, item 2

Income Tax Assessment Act 1997, section 170-45; as in effect before amendments introduced by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002)

New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 3, items 37, 38 and 39, as amended by:

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New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (No. 90 of 2002), Schedule 11, item 1

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New Business Tax System (Consolidation and Other Measures) Act 2003 (No. 16 of 2003), Schedule 19, item 6

History

Revision history

Section C3-5-110 first published 2 October 2003.

Current at 2 October 2003