Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 - Background to legislation
4.1 Under the ITAA 1936 a tax loss incurred by a taxpayer in a year of income may generally be carried forward and deducted from the taxpayer's assessable income in a later year. Losses incurred in the 1989-90 and later income years may be carried forward indefinitely until recouped. There are special rules for the carry forward and deduction of losses arising from foreign income deductions. The relevant provisions are sections 79D, 79E, 80 and 160AFD. There are also special rules for the deduction of film losses (sections 79F and 80AAA).
4.2 In the case of companies, there are provisions in the ITAA 1936 (sections 80A to 80F) which limit the deductibility of prior year losses. These provisions contain tests that need to be satisfied by a company before losses can be recouped in a later income year. These tests have the effect that a company can carry forward a loss if there is continuity of majority beneficial ownership of certain dividend, capital and voting rights of the company. Where there is a change in the beneficial ownership of shares in the company or another company which has resulted in that continuity not being satisfied, the company can carry forward a loss if, among other things, it carries on the same business as it carried on at the time of change. There are also additional rules to prevent the carry forward of a loss in certain circumstances.
4.3 There are also provisions which limit deductibility of current year losses of companies (sections 50A to 50N). Under these provisions a company may not be able to offset deductions incurred by the company which are attributable to one part of an income year against assessable income of the company which is attributable to another part of the income year. This would be the result where an event or circumstance occurs during the income year which is similar to those events or circumstances which result in the company not being able to deduct a prior year loss (see paragraph 4.2).
4.4 Provisions are contained in sections 63A to 63C of the ITAA 1936 which limit the deductibility of bad debts and certain deductions in respect of debt/equity swaps (called 'debt deductions' in this Explanatory Memorandum). These provisions are similar to the prior year loss provisions applying to companies, but apply for different periods relating to the incurring and writing off of the relevant debt.
4.5 The loss and company loss provisions described above have been re-written as part of the Tax Law Improvement Project (TLIP) and are included as part of the Income Tax Assessment Act 1997 (see Divisions 36, 165, 166, 175 and 375 of that Bill). The company bad debt rules have not yet been included in the TLIP re-write but are to be inserted in Subdivision 165-C.
4.6 There are no provisions in the ITAA 1936 similar to sections 80A to 80F, 50A to 50N or 63A to 63C and equivalent provisions in the ITAA 1997 that apply to trusts. The Bill proposes to insert Schedule 2F into the ITAA 1936 to limit the deductibility of prior and current year trust losses and debt deductions. The rules differ from those currently applicable to companies reflecting the different features of trusts as compared to companies.