Taxation Laws Amendment Act (No. 5) 2003 (142 of 2003)

Schedule 8   Tax losses

Income Tax Assessment Act 1997

11   At the end of Division 36

Add (before the link note):

Subdivision 36-C - Excess franking offsets

Guide to Subdivision 36-C

36-50 What this Subdivision is about

Amounts of tax offsets to which a corporate tax entity is entitled under Division 207 and Subdivision 210-H may in some circumstances be converted into an amount of a tax loss for the entity.

Table of sections

Operative provision

36-55 Converting excess franking offsets into tax loss

[This is the end of the Guide.]

Operative provision

36-55 Converting excess franking offsets into tax loss

Excess franking offsets

(1) An entity that is a *corporate tax entity at any time during an income year has an amount of excess franking offsets for that year if:

(a) the total amount of *tax offsets to which the entity is entitled for that year under Division 207 and Subdivision 210-H (except those that are subject to the refundable tax offset rules because of section 67-25);

exceeds:

(b) the amount of income tax that the entity would have to pay on its taxable income for that year if:

(i) it did not have those tax offsets; and

(ii) it did not have any tax offsets that are subject to the tax offset carry forward rules or the refundable tax offset rules;

but had all its other tax offsets.

The excess is the amount of excess franking offsets .

Note: Division 65 sets out the tax offset carry forward rules. Division 67 sets out the refundable tax offset rules.

Example: For the 2002-2003 income year, Company E has:

· assessable income of $200 (franked distribution of $140 and franking credit of $60); and

· $100 of deductions that are allowable.

The tax offset of $60 from the franking credit is not subject to the refundable tax offset rules in Division 67.

Disregarding the tax offset of $60 from the franking credit, the amount of income tax that Company E would have to pay is $30:

This amount is $30 less than the tax offset of $60. Company E therefore has an amount of excess franking offsets of $30 for that year.

How to work out the amount of the tax loss

(2) For the purposes of this Act, if:

(a) an entity has an amount of *excess franking offsets for an income year; and

(b) the result of applying the following method statement is a positive amount;

then:

(c) the entity is taken to have a *tax loss for that year equal to that positive amount (instead of an amount of tax loss worked out under section 36-10, 165-70, 175-35 or 701-30); and

(d) that year is taken to be a *loss year for the entity if the entity would not otherwise have a tax loss for that year.

Method statement

Step 1. Work out the amount (if any) that would have been the entity's *tax loss for that year under section 36-10, 165-70, 175-35 or 701-30 if the entity's *net exempt income for that year (if any) were disregarded.

Note: See section 36-20 for the calculation of net exempt income.

Step 2. Divide the amount of *excess franking offsets by the *corporate tax rate.

Step 3. Add the results of steps 1 and 2.

Step 4. Reduce the result of step 3 by the entity's *net exempt income for that year (if any).

The result of this step is taken to be the entity's *tax loss for that year. However, if the result of this step is nil or a negative amount, the company does not have any tax loss for that year.

Example: Assume that company E did not derive any exempt income for the 2002-2003 income year and that it would not otherwise have any tax loss for that year under section 36-10, 165-70, 175-35 or 701-30.

Applying the method statement, the amount of excess franking offsets of $30 generates a tax loss of $100 for that year, which can be deducted in a later income year under section 36-15 or 36-17.