Supplementary Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Tax losses - consequential amendments to the consolidation provisions
Outline of chapter
3.1 Amendments 14 and 15 refine a number of items in Schedule 8 to the bill so that these items apply appropriately to consolidated groups. The amendments ensure that allowing corporate tax entities to choose the amount of their prior year losses to deduct in a later year of income does not have unintended consequences for the consolidation loss rules in section 707-310 of the ITAA 1997.
Explanation of amendments
3.2 The amendments ensure that the limit on the amount of transferred losses able to be used by the head company of a consolidated group in section 707-310 of the ITAA 1997 is set on the assumption that the head company chooses to use all its available group losses. [Schedule 8, item 17B, paragraph 707-310(3A)(a)]
3.3 This ensures that choosing to use less than the available amount of group losses does not result in a head company using transferred losses before group losses of the same kind.
3.4 Group losses are losses incurred by the consolidated group itself. Transferred losses are losses incurred by members of the group prior to consolidating and are transferred to the head company upon entry to consolidation. The consolidation loss rules were designed so that group losses should be used before transferred losses.
3.5 Other choices made by the head company in the calculation of its actual taxable income will apply for the purposes of deriving the limit on the amount of transferred losses it can use. [Schedule 8, item 17B, paragraph 707-310(3A)(b)]
3.5 The amendments will also ensure that the amount of transferred losses able to be used by a head company is reduced to reflect the amount of available franking offsets. This is necessary to ensure that subsection 36-17(5) of the ITAA 1997, which prevents an entity from deducting an amount of prior year tax loss that would give rise to an excess franking offset, does not result in transferred losses being used before group losses of the same kind. [Schedule 8, item 17A, paragraph 707-310(3)(c) and item 17B, paragraph 707-310(3A)(c)]
3.6 The amendments will apply from 1 July 2002.