Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 3 - Income tax-related transactions
Outline of chapter
3.1 Part 3 of Schedule 1 to this bill will allow companies to transfer tax losses, net capital losses and excess foreign tax credits without attracting GST.
Context of amendments
3.2 The income tax legislation allows companies to transfer income tax amounts (such as losses and foreign tax credits) to members of the same wholly-owned group in certain circumstances.
3.3 Subdivisions 170-A and 170-B of the ITAA 1997 allow a loss company to transfer tax losses and net capital losses to an income company in certain circumstances. The transfer is effected by a transfer document (a written agreement between the 2 companies and signed by a public officer of each company). Subdivision 170-A governs the process by which tax losses are transferred and Subdivision 170-B governs the transfer of net capital losses within wholly-owned groups.
3.4 In addition, section 160AFE of the ITAA 1936 allows for the transfer of foreign tax credits between members of a wholly-owned group. Subsection 160AFE(1D) provides that a credit company can transfer excess foreign tax credits to an income company if they have been members of the same company group for the whole of the income year in which the transfer is made. Again, there must be a signed agreement between the credit company and the income company for the transfer to be effective.
3.5 A transfer of an income tax loss or net capital loss under the ITAA 1997, or of a foreign tax credit under the ITAA 1936, is a supply and will generally be subject to GST under section 9-5 of the GST Act.
3.6 Even where the transfer is made for no consideration, because the supply is between associates, the supply may still be subject to GST under Division 72 of the GST Act where the recipient of the supply is either not registered for GST or is otherwise unable to claim a full input tax credit on the acquisition. Transfers to an associate without consideration will not be taxable under Division 72 of the GST Act where the recipient is entitled to a full input tax credit.
3.7 However, where the transfer is between 2 companies that are members of the same GST group, the transfer will not be subject to GST under Division 48 of the GST Act.
3.8 In most circumstances, the recipient of the supply will be entitled to an input tax credit for any GST paid on the acquisition of the losses or foreign tax credits. However, an entity that is not registered for GST or is involved in making input taxed supplies would be denied all or part of its input tax credits.
Summary of new law
3.9 The amendment ensures that transfers of certain income tax amounts are not subject to GST. That is, where a company transfers:
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- a tax loss in accordance with Subdivision 170-A of the ITAA 1997;
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- a net capital loss in accordance with Subdivision 170-B of the ITAA 1997; or
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- an excess foreign tax credit in accordance with section 160AFE of the ITAA 1936,
these transfers are not subject to GST.
| New law | Current law |
|---|---|
| Transfers of tax losses and net capital losses are not subject to GST. |
Transfers of tax losses and net capital losses are subject to GST, where they satisfy the criteria of a taxable supply contained in section 9-5. Even where there is no consideration the transfer may be a taxable supply because it is a supply to an associate entity. Transfers between members of the same GST group are not subject to GST. |
| Transfers of foreign tax credits are not subject to GST. |
Transfers of excess foreign tax credits may be a taxable supply under the associate provisions where the recipient of the tax credits would be unable to claim a full input tax credit for the acquisition. Transfers between members of the same GST group are not subject to GST. |
Detailed explanation of new law
3.10 This bill inserts Division 110 into the GST Act. This Division ensures that transfers of certain income tax amounts are not subject to GST. [Schedule 1, item 11, section 110-1]
3.11 Subsection 110-5(1) ensures that where an entity transfers:
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- a tax loss in accordance with Subdivision 170-A of the ITAA 1997; or
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- a net capital loss in accordance with Subdivision 170-B of the ITAA 1997,
the transfer is not subject to GST. [Schedule 1, item 11, subsection 110-5(1)]
3.12Subsection 110-5(2) ensures that section 9-5 of the GST Act about taxable supplies does not apply to these transactions. [Schedule 1, item 11, subsection 110-5(2)]
Example 3.1
Company A and Company B are both members of the same wholly-owned group and otherwise satisfy the requirements to transfer a tax loss under Subdivision 170-A of the ITAA 1997.
Company A enters into a written agreement in December 2002 to transfer a 1998-1999 loss to Company B for the 2001-2002 income year. Because the transfer satisfies the requirements of Subdivision 170-A of the ITAA 1997, the transfer is not subject to GST.
3.13 Similarly, where an entity transfers an excess foreign tax credit in accordance with section 160AFE of the ITAA 1936, the transfer is not subject to GST. [Schedule 1, item 11, subsection 110-10(1)]
3.14 Subsection 110-10(2) ensures that section 9-5 of the GST Act about taxable supplies does not apply to these transactions. [Schedule 1, item 11, subsection 110-10(2)]
3.15 Definitions of net capital loss and tax loss are inserted in section 195-1 of the GST Act and have the meanings given by those terms in the ITAA 1997. [Schedule 1, items 14 and 16]
3.16 Item 5B is inserted into the table in section 9-39 and item 17A is inserted into the table in section 37-1 of the GST Act. These items are included in a check list of special rules to help guide readers to Division 110. [Schedule 1, items 9 and 10]
Application and transitional provisions
3.17 The amendments apply, and are taken to have applied, in relation to net amounts for tax periods starting (or that started) on or after 1 July 2000. [Schedule 1, item 19]