Supplementary Explanatory Memorandum & Correction to Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Company losses and bad debts
Outline of Chapter
1.1 Part 1 of Schedule 1 to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 (the Bill) contains amendments to the Income Tax Assessment Act 1997 (ITAA 1997) to make changes to the continuity of ownership test and the unrealised loss measures applying to companies. The technical amendments to the Bill are necessary to ensure that the measures operate as intended.
1.2 Part 1 of Schedule 1 to the Bill also contains amendments to the company loss transfer provisions and the linked group measures. The amendments now being made also make corrections to those provisions in the Bill.
Context of reform
1.3 The Bill was introduced into Parliament on 13 April 2000. The Bill gives effect to changes in the continuity of ownership test as announced in Treasurer's Press Release No. 69 of 21 September 1999 and No. 74 of 11 November 1999. The amendments generally relate to changes proposed by the Bill to the continuity of ownership test and the unrealised loss measures applying to companies.
Summary of new law
1.4 The amendments will:
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- apply the same business test in some cases to a trading stock loss that may arise when an item is revalued under Division 70;
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- extend the same share or interest rule to interests held by an interposed entity in a loss company;
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- clarify the scope of the existing saving provisions so that they are concerned only with losses that are recognised as deductions and capital losses;
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- extend the saving provisions to apply to deductions and capital losses arising from any capital gains tax (CGT) event; and
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- make miscellaneous technical corrections to the company loss transfer provisions and the linked group measures.
1.5 The amendments are summarised in Table 1.1.
| Provision | What the amendment will do | What the provision does |
|---|---|---|
| Amendment 5 | The definition of trading stock loss will be extended to cover the case where a loss is available on the revaluation of trading stock under Division 70.
Where an item of trading stock is revalued, the trading stock loss amount will be defined as the deficiency between:
|
The unrealised loss rules apply the same business test to a loss on an item of trading stock held at changeover time when the item is disposed of or when the item ceases to be trading stock. The measures do not currently apply where the item is revalued.
There is no provision for a trading stock loss amount where an item of trading stock is revalued. |
| Amendment 10 | For the purposes of the same share or interest rule, shares held by an interposed entity in a loss subsidiary are taken into account provided that they are exactly the same shares and are held by the interposed entity. | The current same share or interest rule takes into account the holding company's shares in a loss subsidiary and an interposed entity, or an interposed entity's interests in another interposed entity. The rule does not, however, include an interposed entity's shares in a loss subsidiary. |
| Amendments 1 to 4, 6 to 9, 11 and 12 | For the purposes of determining the percentage of an underlying tax loss (or realised/unrealised net capital loss or bad debt) that has been duplicated, the saving provision will now take into account not only disposals of equity interests in a loss company but also other CGT events where deductions or losses may be available.
The saving provision will only take into account deductions and capital losses reflecting an underlying tax loss. A deduction or capital loss will be included even where the availability of the deduction or loss is deferred. |
The saving provision only takes into account losses on the disposal of equity interests. The provision does not cover other situations where losses may be available.
The saving provision could include an economic loss that for whatever reason would not attract a deduction or capital loss. The provision is also unclear on whether a deferred deduction or loss would be taken into account. |
| Amendment 17 | The amendment alters the application date of certain amendments to the loss transfer provisions. The amendments clarify the factors to be taken into account in making cost base adjustments under Subdivision 170-C. | The relevant provisions specify that certain factors are to be taken into account in making increasing adjustments to the cost bases and reduced cost bases of equity or debt interests in a company which has had a loss transferred to it. |
Comparison of key features of new law and current law
1.6 For a comparison of key features of new law and current law refer to the comparison table in the explanatory memorandum to the Bill.
Detailed explanation of new law
1.7 The unrealised loss measures apply to a company that fails the continuity of ownership test and at the time of failure (changeover time), has an unrealised net loss in respect of the company's assets held at that time. The unrealised loss rules have been amended in the Bill to apply the same business test to a loss on an item of trading stock held at changeover time.
1.8 It is necessary to amend certain aspects of this provision because it only applies to a trading stock loss arising when a relevant item of trading stock is disposed of or when the item ceases to be trading stock. The provision does not currently apply where there is a loss on revaluation. The amendment provides that a company makes a trading loss in respect of an item of trading stock where the item is disposed of, the item ceases to be trading stock or where the item is revalued under Division 70. [Amendment 5, Schedule 1, item 8, subsection 165-115A(1D)]
Modified same share or interest rule
1.9 Division 166 of the ITAA 1997 contains a modified continuity of ownership test that applies special tracing rules to listed public companies. Schedule 1 of the Billintroduces a same share or interest rule to determine whether a 100% subsidiary of a listed public company satisfies the continuity of ownership test.
1.10 Under the current provision there is no substantial continuity of ownership unless any direct or indirect equity interests held by the holding company in the entity interposed between the holding company and the subsidiary, that are to be taken into account, are exactly the same interests held by the same person throughout the test period. The amendment is necessary to ensure that shares held by an interposed entity in the subsidiary are taken into account provided they are exactly the same shares and held by the interposed entity. [Amendment 10, Schedule 1, item 34, paragraph 166-170(2)(a)]
1.11 The Bill introduced a saving provision to apply in certain circumstances to prevent a company's tax loss from being subject to the same business test where the continuity of ownership has failed. A condition that has to be satisfied for the saving provision to apply is that the company must be able to prove that less than 50% of the tax loss has been duplicated on the disposal of any equity interest in the company. Saving provisions also apply in relation to a company's net capital loss (realised or unrealised) or bad debt deduction.
1.12 Amendments are necessary to clarify the scope of the saving provisions. Firstly, the saving provisions will be amended to take into account not only disposals of equity interests in a loss company but also other CGT events where losses may reflect the company's loss.
1.13 Secondly, the amendments will ensure that only an economic loss on the disposal of equity interests resulting in a deduction or capital loss is taken into account. Such a deduction or loss will be taken into account even where the deduction or loss is deferred.
1.14 The current saving provisions in the Bill could take into account all economic losses, including an economic loss that would not attract a deduction or capital loss. The provisions are unclear on whether a deduction or loss would be taken into account where the loss or deduction is deferred.
1.15 Finally, the exclusion of interests to which Subdivision 165-CD has applied has been removed in the amended provisions. The exclusion is no longer necessary because the amended provisions are concerned only with CGT events that result in deductions or capital losses that reflect the underlying tax loss. The interests to which Subdivision 165-CD has applied have therefore already been excluded because Subdivision 165-CD ensures that those interests will not result in such deductions or capital losses.
[Amendments 1 to 4, 6 to 9, 11 and 12, Schedule 1, item 3, paragraph 165-12(7)(b) and subsection 165-12(8); item 5, paragraph 165-37(4)(b) and subsection 165-37(5); item 15, paragraph 165-115C(4)(b) and subsection 165-115C(5); item 20, paragraph 165-123(7)(b) and subsection 165-123(8); item 34, paragraph 166-170(8)(b) and subsection 166-170(10)]
Miscellaneous corrections - loss transfer provisions and linked group measures
1.16 The following amendments make technical corrections to the loss transfer provisions (Subdivision 170-C):
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- The existing application dates for paragraphs 170-215(3)(aa) and (ab) and 170-225(3)(aa) and (ab) are incorrect. The correct application dates for these paragraphs are as follows:
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- paragraphs 170-215(3)(aa) and 170-225(3)(aa), which specify certain factors to be taken into account in making increasing adjustments to the cost bases and reduced cost bases of shares or debts, are to apply where the agreement transferring the relevant tax loss or net capital loss was made on or after 22 February 1999;
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- paragraphs 170-215(3)(ab) and 170-225(3)(ab) are to apply where the agreement transferring the relevant tax loss or net capital loss was made on or after 13 April 2000. The application date of these amendments is changed to the date of introduction of the Bill into the House of Representatives because the amendments may, in some cases, disadvantage taxpayers. [Amendment 17, Schedule 1, item 68, paragraphs 170-215(3)(aa) and (ab) and paragraphs 170-225(3)(aa) and (ab)]
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- Paragraph 170-220(3)(ab) has been incorrectly inserted and is to be removed. [Amendment 13, Schedule 1, item 48 subsection 170-220(3)]
1.17 Minor corrections are made to the linked group measures (Subdivision 170-D) to correct the following typographical errors:
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- in item 62 of the Bill the heading 'paragraphs 170-275(1)(a) to (c)' is changed to 'paragraphs 170-275(1)(a) to (e)' [Amendment 14, Schedule 1, item 62, subsection 170-275(1)] ;
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- in item 65 of the Bill the heading 'paragraphs 170-280(1)(a) to (c)' is changed to 'paragraphs 170-280(1)(a) to (e)' [Amendment 15, Schedule 1, item 65, subsection 170-280(1)] ; and
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- in subsection 170-280(3) 'new event' is changed to 'further event' [Amendment 16, Schedule 1, item 68, subsection 170-280(3)] .
Application and transitional provisions
1.18 There are no application and transitional provisions arising from these amendments.
Consequential amendments
1.19 There are no consequential amendments arising from these amendments.