Senate

Supplementary Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 - Tax losses

Outline of chapter

5.1 The amendments contained in Schedule 8 will ensure that corporate tax entities are no longer required to use up ('waste') losses that could be deductible in a later year of income against franked dividend (effectively tax-free) income.

5.2 Firstly, corporate tax entities will be able to choose the amount of prior year losses they wish to deduct in a later year of income. Providing choice also means that corporate tax entities could choose not to deduct prior year losses in order to pay sufficient tax to be able to frank their distributions.

5.3 Secondly, corporate tax entities will be able to treat a current year loss that would otherwise be used up against franked dividend income as a tax loss for that income year and be able to carry forward the tax loss for consideration as a deduction in a later year of income. The relevant current year loss will be identified by reference to the amount of any unused franking tax offset for the income year.

Context of amendments

Choosing to deduct a prior year loss

5.4 The Review of Business Taxation gave consideration to the operation of the income tax law whereby a corporate tax entity cannot choose the amount of prior year tax loss it wishes to deduct and specifically the impact of the new consolidation regime. Broadly, where a taxpayer has a prior year tax loss then to the extent the taxpayer has an excess of assessable income over allowable deductions in a later year of income the prior year tax loss must be deducted.

5.5 Corporate groups would usually structure to ensure that distributions from outside the group are paid to the holding company with any losses held by subsidiaries. Under the previous loss transfer provisions, the holding company and subsidiary could agree on the amount of loss to be transferred. This allows the holding company the option of not absorbing group losses against distributions received by the holding company from outside the group. The requirement to pool group losses under consolidation removes this option.

5.6 Recommendation 11.5 of A Tax System Redesigned recommended that corporate entities be able to choose the proportion of their prior year losses to be deducted in an income year.

5.7 The Review of Business Taxation also concluded that providing choice enables corporate tax entities to fully frank distributions even when they have large prior year losses. By not fully claiming the losses, a corporate tax entity could pay sufficient tax to frank the distributions.

Current year losses

What is a 'current year' loss?

5.8 In the context of this measure a current year loss is a tax loss (the excess of allowable deductions over assessable and exempt income) that a company would have otherwise incurred for an income year but for deriving franked dividend income in that year. For example, a company may have a trading loss of $100 but also received a fully franked dividend of $70. In calculating its taxable income the company is required to gross up the franked dividend by including the $30 imputation credit. The $100 trading loss is required to be deducted against the $100 grossed up amount with a resulting taxable income figure of $0. There is a notional entitlement to a franking tax offset of $30 but it is not used.

How are current year losses 'wasted'?

5.9 In the example in the previous paragraph, if the company was able to quarantine the trading loss from its taxable income calculation then its taxable income would be the grossed up franked dividend amount of $100. However, applying the franking rebate reduces the tax on the taxable income to nil. The loss can be said to be wasted because the company can achieve a nil tax outcome without using the loss.

Summary of new law

5.10 The general rule applying to all taxpayers on how to deduct prior year losses will be complemented by a specific rule that will apply to corporate tax entities. The new rule will operate in a similar manner to the general rule, by offsetting the prior year tax loss first against net exempt income. However, beyond that, corporate tax entities will be able to choose the amount of the tax loss they want to deduct. In certain circumstances that choice will be able to be changed.

5.11 For current year losses, unused franking tax offsets (the excess franking offsets) will be identified as part of the income tax calculation. The amount of excess franking offsets will be converted to an equivalent amount of a tax loss and aggregated with any other tax loss for the income year.

Detailed explanation of new law

Confining the application of the general rule on how to deduct tax losses

5.12 Section 36-15 of the ITAA 1997 is the general rule for all taxpayers on how to deduct tax losses. Because a special rule is to be inserted for corporate tax entities, section 36-15 needs to be amended to indicate its more narrow application to entities other than corporate tax entities. [Schedule 8, items 7 and 8, section 36-15 (heading), subsection 36-15(1) of the ITAA 1997]

How corporate tax entities will deduct tax losses

Corporate tax entities

5.13 The new rule will apply to corporate tax entities. Section 960-115 of the ITAA 1997 defines corporate tax entities as companies, corporate limited partnerships, corporate unit trusts and public trading trusts.

5.14 The distinguishing feature of these entities is that they are generally not entitled to a refund of excess franking offsets. Those who are entitled to such refunds (individuals, complying superannuation funds and certain other entities) are not affected by the absorption of prior year losses by franked dividend income. Refundable excess franking tax offsets effectively give these taxpayers the full benefit of the losses immediately.

Tax loss is to be absorbed first by the net exempt income

5.15 As with the general rule a corporate tax entity will be required to first deduct a prior year tax loss from any net exempt income in the later income year.

5.16 If there is no exempt income an entity can deduct so much of the tax loss as it chooses subject to the limitation set out below. [Schedule 8, item 9, subsection 36-17(2) of the ITAA 1997]

5.17 If the entity has:

•

net exempt income; and

•

assessable income exceeds allowable deductions (other than the tax loss),

the tax loss has to be first applied against net exempt income and then the entity can deduct the amount of the tax loss (if any remains) that it chooses subject to the limitation set out below. [Schedule 8, item 9, subsection 36-17(3)]

5.18 Conversely, if the entity has:

•

net exempt income; and

•

allowable deductions (other than the tax loss) exceed assessable income,

that excess must be applied against net exempt income and then the tax loss must be applied against any net exempt income that remains. There is no choice in this situation. [Schedule 8, item 9, subsection 36-17(4)]

5.19 In those circumstances where the entity has a choice it can choose a nil amount.

5.20 An entity's choice must be made in the income tax return for the relevant income year [Schedule 8, item 9, subsection 36-17(6)]. However, see below for an explanation of the circumstances when an entity can change its choice and how it does so.

A limit where an entity already has or can generate excess franking offsets for the income year

5.21 As part of this measure amendments are being made to ensure a corporate tax entity does not waste current year losses against franked dividend income. The current year loss is identified by reference to any franking tax offset that is unused (excess franking offsets) by the entity.

5.22 If an entity has excess franking offsets without deducting any amount of a tax loss then it must choose to deduct no amount of the tax loss. [Schedule 8, item 9, paragraph 36-17(5)(a)]

5.23 Similarly an entity cannot choose an amount of tax loss that would give rise to an excess franking offset [Schedule 8, item 9, paragraph 36-17(5)(b)]. Subsection 36-17(5) includes a detailed example.

5.24 If corporate tax entities were allowed to generate an excess franking offset which is then converted into a tax loss for the income year the tax loss would be 'refreshed'. That is, the prior year tax loss would become a tax loss of a later year of income. This impacts on the application of the tests for deductibility of prior year losses, specifically the continuity of ownership test in Subdivision 165-A of the ITAA 1997. Broadly, the time for testing for continuity of ownership would move to the start of the later income year in which the tax loss had been refreshed.

Changing the amount of tax loss originally chosen for deduction

5.25 When an entity chooses to deduct an amount of a tax loss it must do so in its income tax return for the relevant year of income. After an entity has lodged its tax return for the income year, in certain circumstances it will be able to either:

•

make an initial choice where it was not previously allowed to make a choice [Schedule 8, item 9, subsection 36-17(11)] ; or

•

choose another amount of tax loss over an amount previously chosen [Schedule 8, item 9, subsection 36-17(12)].

5.26 Where an entity makes an initial choice or a revised choice after lodging its income tax return it will need to notify the Commissioner in writing.

5.27 There are 3 situations when an entity can make a later initial choice or change its choice. These involve the recalculation of amounts that are generally relevant to the consideration of the amount of tax loss originally chosen.

5.28 The first situation is where the amount of tax loss an entity can deduct is recalculated. For example, as the result of a review an entity ascertains that its tax loss of an earlier income year is greater than previously calculated. Provided there is sufficient net assessable income in the later income year the entity can change its choice and deduct the increased tax loss. [Schedule 8, item 9, paragraph 36-17(10)(a)]

5.29 The second situation is where, in relation to the income year in which the tax loss is deductible, the amount of difference between assessable income and allowable deductions is recalculated.

Example 5.1

Assuming no net exempt income, Company A originally had an excess of assessable income over allowable deductions of $100. It has sufficient prior tax losses to reduce that excess to nil and chooses in its tax return to deduct a tax loss of $100.

Subsequent to lodging its income tax return, Company A reviews its tax affairs and ascertains it has an excess of $200. Because it has sufficient losses available it changes its choice and deducts a tax loss of $200.

[Schedule 8, item 9, paragraph 36-17(10)(b)]

5.30 The third situation is where, in relation to the income year in which the tax loss is deductible, the amount of net exempt income is recalculated. [Schedule 8, item 9, paragraph 36-17(10)(c)]

5.31 The ability to make initial choices or change choices after lodging the tax return for the income year in these circumstances ensures that the operation of section 36-17 closely mirrors section 36-15, the general rule for deducting tax losses. In the circumstances set out in subsection 36-17(12), section 36-15 would have operated such that the tax loss amounts deducted would be adjusted automatically.

General rules

5.32 There are some general rules that apply to the deduction of tax losses under section 36-15 that will apply in the same way to tax loss deductions under section 36-17:

•

tax losses must be deducted in the order in which they are incurred [Schedule 8, item 9, subsection 36-17(7)] ;

•

once deducted a tax loss cannot give rise to another deduction [Schedule 8, item 9, subsection 36-17(8)] ; and

•

if a tax loss (or part of a tax loss) cannot be deducted it can be considered for deduction in the next income year [Schedule 8, item 9, subsection 36-17(9)].

Group loss transfer rules

5.33 Under the group loss transfer rules there is a limit to the amount of tax loss that one member of the group (the loss company) can transfer to another member of the group. Broadly, one of the rules is that the loss company can only transfer an amount of loss that the loss company itself cannot use.

5.34 Under the current rules this equates to the tax loss which the loss company carries forward. However, by providing choice the amount of tax loss carry forward may not represent the amount of tax loss the company could not use.

5.35 To ensure the rule is maintained the amount of loss that can be transferred is the amount that would have been the carry forward tax loss if the loss company had chosen to deduct the maximum amount of tax loss that it could deduct under section 36-17. This has the effect that if the loss company chooses to deduct a lesser amount of tax loss the amount of tax loss that can be transferred is similarly reduced. [Schedule 8, item 15, subsection 170-45(1) of the ITAA 1997]

Example 5.2

A loss company in a group has a prior year tax loss of $500. In a later year of income its total assessable income exceeds its allowable deductions by $200 (and there is no net exempt income). The loss company chooses a nil amount under subsection 36-17(2). The tax loss it would carry forward if it had deducted the maximum amount would have been $300 ($500 - $200). The amount that the loss company can transfer under the group loss provisions cannot exceed $300.

5.36 With the introduction of the consolidation regime the group loss transfer rules have limited ongoing application.

Current year losses

5.37 Broadly where an entity has excess franking tax offsets because it has insufficient tax payable on taxable income the amount of that excess is converted into an equivalent amount of tax loss. This tax loss is then aggregated with any other tax loss for the year and the aggregated amount becomes the tax loss for the income year.

Calculating excess franking offsets

5.38 Firstly, calculate the amount of franking tax offsets to which the entity is entitled. Franking tax offsets are available under Division 207 as a result of receiving a franked distribution and Subdivision 210-H as a result of receiving a distribution franked with a venture capital credit.

5.39 Excluded from this amount are any franking tax offsets that are refundable offsets. Generally corporate tax entities are not entitled to a refund of excess franking tax offsets and so this would normally be a nil amount. However, there is an exception for life insurance companies who may be entitled to refundable franking tax offsets. [Schedule 8, item 11, paragraph 36-55(1)(a) of the ITAA 1997]

5.40 Secondly, calculate the amount of income tax payable. In this calculation:

•

ignore the amount of offsets calculated in the first step as well as tax offsets subject to the refundable tax offset rules or the carry forward tax offset rules. (This enables these 2 types of offsets to be maximised.); and

•

take into account all other tax offsets, if any.

[Schedule 8, item 11, paragraph 36-55(1)(b)]

5.41 If the amount from step 1 exceeds the amount from step 2, the excess is the amount of excess franking offsets. This is a defined term. [Schedule 8, item 18, definition of 'excess franking offsets' in subsection 995-1(1)]

Converting the excess franking offset into a tax loss

5.42 The amount of excess franking offset is converted into an equivalent amount of tax loss (by dividing the amount by the corporate tax rate). This tax loss needs to be added to any tax loss otherwise calculated for the income year and the aggregate amount treated as the tax loss for the income year (known as a loss year). The method statement ensures the aggregate amount of tax loss has been properly reduced by any amount of net exempt income for the income year. [Schedule 8, item 11, subsection 36-55(2)]

Example 5.3

Company B has:

•

assessable income of $200 (being a fully franked dividend of $140 and the franking credit of $60);

•

allowable deductions of $400; and

•

net exempt income of $80.

Company B calculates its section 36-10 tax loss as $120 (i.e. $400  - $200  -  $80) and its excess franking offset amount under subsection 36-55(1) as $60.

Applying the method statement:

Step 1 amount: $200 ($400 - $200)

Step 2 amount: $200 ($60 / 30%)

Step 3 amount: $400 ($200 + $200)

Step 4 amount: $320 ($400 - $80)

Company B therefore has a tax loss for the year of $320.

Application and transitional provisions

5.43 The rule about choosing to deduct a prior year loss will apply to deductions of tax losses in the income year in which 1 July 2002 falls and later income years. [Schedule 8, subitems 24(1) and (2)]

5.44 Ensuring current year losses are not wasted will apply to the income year in which 1 July 2002 falls and later income years. [Schedule 8, subitem 24(3)]

5.45 The amendments to the PAYG provisions will apply to a base year that is an income year in which 1 July 2002 falls and later income years. [Schedule 8, subitem 24(4)]

Consequential amendments

PAYG instalment provisions

5.46 Broadly, an entity's instalment rate for working out PAYG instalments is based on an entity's notional tax which is its tax for the most recent year that has been assessed (called the base year) and based on an adjusted taxable income amount.

5.47 The adjusted taxable income of an entity is generally worked out by subtracting from its assessable income for its base year:

•

any net capital gain included in assessable income;

•

all deductions other than tax losses; and

•

any tax losses carried forward to the next income year.

5.48 This general rule is modified where the amount of tax losses deducted in a year of income does not necessarily reflect the amount of tax losses that could have been deducted. In this situation, to ensure that the adjusted taxable income is correctly calculated, the calculation subtracts the lesser of any tax loss deducted in the base year and the amount of any tax loss that is carried forward to the next year.

5.49 Because a corporate tax entity will be able to choose to deduct a prior year loss it means an amount deducted in a given year may be less than the pool of carry forward losses available to them. Consequently, the modification to the general rule will need to cover corporate tax entities generally. [Schedule 8, items 22 and 23, subsections 45-330(2A) and (3) in Schedule 1 to the TAA 1953]

Consolidation interactions

5.50 Consequential amendments are needed so that the new loss rules interact appropriately with rules in section 707-310 of the ITAA 1997 that restrict the use of transferred losses by consolidated groups.

5.51 The limit on the amount of transferred losses able to be used by the head company of a consolidated group will be 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)]. This prevents transferred losses from being used before group losses of the same kind.

5.52 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.

5.53 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)]

5.54 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 ensures 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); item 17B, paragraph 707-310(3A)(c)]

General consequential amendments

5.55 A note to the core provision that sets out the tax payable calculation will indicate the potential for franking tax offsets to be converted into a tax loss. [Schedule 8, item 4, note 3 to subsection 4-10(3A) of the ITAA 1997]

5.56 The list of special rules about tax losses in section 36-25 of the ITAA 1997 will now include a reference to the tax loss that has been converted from excess franking offsets. [Schedule 8, item 10, section 36-25, table headed 'tax losses of corporate tax entities' of the ITAA 1997]

5.57 A number of minor consequential amendments are needed where other areas of the law refer to how a tax loss is deducted. These references will need to be either to both section 36-15 (for taxpayers generally) and section 36-17 (for corporate tax entities) or only to section 36-17. [Schedule 8, item 1, section 245-110 in Schedule 2C to the ITAA 1936; item 2, section 57-75 in Schedule 2D to the ITAA 1936; item 3, note to subsection 268-60(5) in Schedule 2F to the ITAA 1936; item 4, note 3 to subsection 4-10(3A) of the ITAA 1997; item 12, note to subsection 165-70(5) of the ITAA 1997; item 14, subsection 170-20(1) of the ITAA 1997; item 16, note to subsection 175-35(5) of the ITAA 1997]

5.58 Minor consequential amendments are also needed to modify or include notes indicating that the term tax loss and/or loss year are being modified by the inclusion of section 36-55. [Schedule 8, items 5 and 6, note to section 36-10; item 13, note to section 165-70; item 17, note to section 175-35; items 19 to 21, notes to definitions of 'loss year' and 'tax loss' in subsection 995-1(1) of the ITAA 1997]

Regulation impact statement - Background

Current year losses

5.59 The imputation system operates such that when a taxpayer is paid a franked dividend both the amount of the dividend and the attached franking credit are included in assessable income (i.e. the assessable income is 'grossed up'). A tax offset equal to the amount of the franking credit is allowed. When a corporate tax entity receives a franked dividend it is effectively freed up from further tax as a result of the franking tax offset.

5.60 A corporate entity that would otherwise have a tax loss in an income year (a 'current year loss') is essentially required to use up that loss against any franked dividend income. Because the franked dividend income is effectively tax free the loss can be said to have been wasted.

5.61 Corporate groups have in the past been able to minimise the 5wastage of losses by separating the franked dividend income and losses between different members of the group. For example, dividend income could be received by the head company of the group while various trading activities (and any losses associated with those activities) could be contained within subsidiaries.

5.62 With the advent of the consolidation regime this ability to quarantine losses from franked dividend income has been removed.

Prior year losses

5.63 The general rule is that prior year losses are automatically deductible in a later year of income. To the extent there is an excess of assessable income over allowable deductions the prior year loss becomes a deduction in that later year of income (after first being deducted against net exempt income). The amount of loss is required to be calculated and deducted in the income tax return.

5.64 The requirement to deduct a prior year loss if there is taxable income available in a later year of income results in that loss being 'wasted' to the extent the income is franked dividend income.

Policy objective

5.65 The overall objective is to ensure that corporate tax entities have the full benefit of deducting current and prior year tax losses against taxable income.

Current year losses

5.66 The objective is to ensure that corporate tax entities do not have to use up losses against franked dividend income which is effectively freed up from tax because of the availability of the franking tax offset.

5.67 In the 2002-2003 Federal Budget the Government announced that from 1 July 2002 corporate tax entities would no longer be required to waste such losses against franked dividend income. This is to apply to all corporate tax entities not only consolidated groups.

Prior year losses

5.68 The objective is to allow corporate tax entities to choose when to deduct their prior year losses to avoid wasting them.

5.69 The Review of Business Taxation concluded that companies should not be required to waste prior year losses, specifically in the context of the introduction of the consolidation regime. Recommendation 11.5 of A Tax System Redesigned recommended that corporate tax entities be able to choose the proportion of their prior year losses to be deducted in an income year.

5.70 Recommendation 11.5 is being implemented as a complementary measure to the Federal Budget announcement on the treatment of current year losses. Further, and as concluded by the Review of Business Taxation, providing this choice will enable corporate tax entities to choose not to deduct prior year losses in order to pay sufficient tax to be able to frank their distributions.

Implementation options

Current year losses

Option 1

5.71 The wasted loss can be quantified by reference to any franking tax offsets that were not able to be used by a corporate entity. Having identified the excess franking offset it would be converted back to the equivalent amount of tax loss. This amount would be aggregated with the actual tax loss for the income year, if any, and the total amount carried forward. This is able to be deducted as a prior year loss in a later year of income.

Option 2

5.72 Under this option the excess franking tax offset would be treated as a carry forward tax offset and be used to reduce income tax that would otherwise be payable in a later income year.

Prior year losses

5.73 Allowing corporate tax entities to be able to choose the amount of prior year losses that they wish to deduct is essentially a change to the mechanism for deducting losses.

5.74 For corporate entities the deduction would not be automatic but they will have to choose the amount of tax loss they wish to deduct. The amount deducted will similarly be deducted in the income tax return.

5.75 Consistent with the automatic adjustment a corporate tax entity will be allowed to change its choice of the amount of tax loss deducted in these circumstances.

5.76 Making this change to the mechanism for deducting prior year losses is the only option available.

Assessment of impacts

Impact group identification

5.77 The measure ensuring that current year losses will not be wasted against franked dividend income, potentially applies to all corporate tax entities. In practice only those entities that have the combination of franked dividend income and a current year loss (an excess of allowable deductions over other assessable income) will be impacted.

5.78 Providing choice for deducting prior year losses will apply to all corporate tax entities.

5.79 The ATO, responsible for administering the tax system, will be impacted.

5.80 Government revenue will also be impacted.

Analysis of costs / benefits

Compliance costs

Current year losses

5.81 Both option 1 and 2 for current year losses will require the identification of the excess franking tax offset amount for a year of income. However, this will be done as part of a corporate tax entity's calculation of income tax payable.

5.82 Option 1 will require the conversion of the excess franking tax offset amount into the equivalent tax loss amount and that amount aggregated with any actual tax loss for the year. As is currently the case entities will need to record this prior year loss to enable it to be carried forward for deduction in a future year of income. This effectively brings it into an existing process.

5.83 Option 2 would not require the additional step of converting the excess franking tax offset into a loss. Rather the excess amount would be treated as a carried forward tax offset. Entities would be required to separately record and track prior year losses and carry forward tax offsets. There would likely be a minor additional cost to recording and carrying forward two separate amounts and corporate tax entities will be required to become familiar with the concept of a carry forward tax offset. While the income tax law does provide a mechanism to carry forward tax offsets there are currently no tax offsets treated this way.

5.84 Compliance costs under either option will be minimal as the measure, as implemented, is essentially an adjunct either to the income tax calculation and/or the existing requirement to record and carry forward certain amounts for consideration in later years of income.

Prior year losses

5.85 Corporate tax entities will choose the amount of prior year losses they wish to deduct in their income tax return. Under the current automatic deduction of a prior year loss the amount required to be deducted is similarly included in a corporate tax entity's tax return and so the process is essentially the same.

5.86 Under the current rules where losses are required to be deducted the deduction adjusts automatically in situations where:

•

the tax loss amount is adjusted;

•

the net assessable income over allowable deductions for the income year is adjusted; or

•

net exempt income for the income year is adjusted.

5.87 For example a corporate tax entity's taxable income amount in a later year of income may be varied because of, say, an amended assessment. Therefore, in these circumstances change of choice will be allowed.

5.88 Changing choice requires an active decision by a corporate tax entity and the Commissioner will need to be notified. However, the circumstances where changing choice will be allowed generally arise because of some other process being undertaken by a corporate tax entity. For example, a corporate tax entity may be reviewing it own tax affairs and has ascertained that an adjustment is necessary or the ATO may be reviewing the affairs of the corporate tax entity. Notifying a change in choice could be part of an amendment assessment. Consequently, any additional compliance costs will be minimal.

Administration costs for the ATO

5.89 Providing corporate tax entities choice is estimated to impose a small one-off administration cost on the ATO as processing systems will have to be adjusted so as not to automatically deduct prior year losses. Providing choice will also involve some minor ongoing costs to administer changes in choice although as previously set out this will occur generally as part of some other process that would be required to be undertaken.

Government revenue

5.90 Ensuring losses are not wasted against franked dividend income is estimated to cost the revenue over the next four years:

Consultation

5.91 Consultation on implementing the proposal took place on 4 June 2002. Representatives from the Treasury, the ATO, tax practitioner and industry bodies attended. Further consultation with the same group occurred during the development of the legislation. The measure will address the concerns raised during consultation about wasting losses.

Conclusion and recommended option

5.92 Option 1 for current year losses is preferred as it means entities will not have to keep track of a separate amount of carry forward offsets but, rather, carried forward as part of a corporate tax entity's stock of prior year losses. This directly addresses the issue by restoring the 'wasted' loss. Existing rules governing the deductibility of losses (continuity of ownership and same business tests) can continue to apply to the 'restored' loss and taxpayers without wasted losses will be unaffected.

5.93 Option 2 is not preferred because it requires the use of carry forward offsets which are not currently part of the record keeping systems of corporate tax entities. Option 2 involves carrying forward 2 separate amounts, tax offsets and tax losses.

5.94 Preventing the wastage of current year losses against franked dividends will ensure that corporate groups are not disadvantaged by the impact of the consolidation regime in removing their ability to quarantine losses from franked dividends.

5.95 It is considered that providing choice in respect of deductions for prior year losses can only be implemented in accordance with the process as set out. Deductions for prior year losses can be adjusted consistent with the current rules. Allowing corporate tax entities to choose to deduct prior year losses similarly ensures that those losses are not wasted against franked dividend income.