Tax Laws Amendment (2007 Measures No. 4) Act 2007 (143 of 2007)

Schedule 1   New foreign income tax offset rules

Part 3   Transitional

Income Tax (Transitional Provisions) Act 1997

5   Before Division 820

Insert:

Division 770 - Foreign income tax offsets and foreign losses

Table of Subdivisions

770-A Transitional foreign losses (common rules)

770-B Transitional foreign losses (special rules for consolidated groups)

770-C Transitional foreign losses (special rules for CFCs)

770-D Transitional foreign income tax offsets (common rules)

770-E Transitional foreign income tax offsets (special rules for consolidated groups)

Subdivision 770-A - Transitional foreign losses (common rules)

Table of sections

Converting an overall foreign loss into a type of tax loss

770-1 Converting a past foreign loss into a tax loss

770-5 Convertible foreign loss

770-10 Reducing the amount of an overall foreign loss of a class of assessable foreign income

Utilising transitional foreign losses

770-15 No special rules if convertible foreign losses total less than or equal to $10,000 or choice made

770-20 Starting total for loss parcel

770-25 Tax loss has foreign loss component

770-30 Deduction limit for foreign loss component

770-35 Offset limit to take account of deducted foreign loss component

Converting an overall foreign loss into a type of tax loss

770-1 Converting a past foreign loss into a tax loss

(1) The Income Tax Assessment Act 1936 (the 1936 Act ), the Income Tax Assessment Act 1997 (the 1997 Act ) and this Act operate for the purposes of the income years mentioned in subsection (3) as if an entity that has a convertible foreign loss for an earlier income year under section 770-5 had a tax loss for the earlier year equal to:

(a) the amount (if any) that would have been the entity's tax loss for the earlier year under section 36-10, 165-70, 175-35 or 701-30 of the 1997 Act (about deducting past tax losses); plus

(b) the amount of the entity's convertible foreign loss for the earlier year.

Note 1: This is instead of an amount of tax loss worked out under section 36-10, 165-70, 175-35 or 701-30 of the 1997 Act.

Note 2: This section does not affect the amount (if any) of an entity's taxable income for the year. An entity may be taken to have a tax loss for a year under this section, but also have a taxable income for the year.

Note 3: This section has an expanded operation for consolidated groups: see section 770-90.

(2) The earlier year is taken for those purposes to be a loss year for the entity if the entity would not otherwise have a tax loss for that year.

(3) The income years are:

(a) the first income year starting on or after the first 1 July that occurs after the day on which the Tax Laws Amendment (2007 Measures No. 4) Act 2007 receives the Royal Assent (the commencement year ); and

(b) later income years.

770-5 Convertible foreign loss

(1) An entity has a loss to which this section applies (a convertible foreign loss ) for an earlier income year covered by subsection (2) if:

(a) the entity has incurred an overall foreign loss in respect of a class of assessable foreign income (within the meaning of former section 160AFD of the 1936 Act) for the earlier year, reduced to the extent that it has been taken into account under that former section in reducing the entity's assessable foreign income of the relevant class for an income year before the commencement year; and

(b) a positive amount remains after reducing the overall foreign loss under section 770-10.

Note 1: For the classes of income, see former subsection 160AFD(8) of the 1936 Act.

Note 2: There is a modification to this rule for losses transferred to a head company of a consolidated group: see subsection 770-80(2).

Note 3: Former section 160AFD of the 1936 Act allowed a past foreign loss to reduce assessable foreign income of the same class.

(2) The income year must be one of the most recent 10 income years ending before the commencement year.

(3) The amount of the convertible foreign loss for the earlier year is the sum of the positive amounts remaining after each overall foreign loss in respect of a class of assessable foreign income for the earlier year is reduced under section 770-10.

770-10 Reducing the amount of an overall foreign loss of a class of assessable foreign income

Apply the following method statement to each overall foreign loss in relation to a class of assessable foreign income of an earlier income year.

Method statement

Step 1. If the entity is a company and the relevant class of assessable foreign income is the "all other assessable income" class - reduce the amount applicable under paragraph 770-5(1)(a) to the extent (if any) that the loss is attributable to losses or outgoings incurred in gaining or producing income of a kind that would be the company's non-assessable non-exempt income if it were gained or produced in the commencement year.

Note: For other entities, there is no reduction under step 1.

Step 2. For income years other than the most recent 7 income years ending before the commencement year - reduce the result of step 1 by half.

Note: Step 2 is modified for losses transferred to a head company of a consolidated group: see subsection 770-80(3).

Utilising transitional foreign losses

770-15 No special rules if convertible foreign losses total less than or equal to $10,000 or choice made

Section 770-30 does not apply in relation to a tax loss an entity is taken by section 770-1 to have if:

(a) the amount worked out under section 770-20 (the starting total ) is less than or equal to $10,000; or

(b) the entity chooses to reduce one or more tax losses the entity is taken by section 770-1 to have had so that the starting total equals $10,000.

770-20 Starting total for loss parcel

The sum of the convertible foreign losses for each earlier year for which an entity is taken by section 770-1 to have a tax loss is the starting total for all of those tax losses taken together (the loss parcel ).

Example: On 1 July 2008, Loss Co determines that it has incurred the following overall foreign losses:

· Year ended 30 June 2002: $5,000 (with no amount of convertible foreign loss due to the operation of 770-10);

· Year ended 30 June 2004: $4,000 (with an amount of $2,000 being a convertible foreign loss);

· Year ended 30 June 2005: $7,000 (with an amount of $3,000 being a convertible foreign loss);

· Year ended 30 June 2007: $8,000 (with the entire amount being a convertible foreign loss).

Loss Co does not have any other domestic tax losses for those income years (that is, the 2002, 2004, 2005 and 2007 income years are not loss years).

Initially, Loss Co's starting total for the loss parcel is $13,000, which consists of the tax losses incurred in the year ended 30 June 2004, the year ended 30 June 2005 and the year ended 30 June 2007 (there is no convertible foreign loss incurred in the year ended 30 June 2002 because of section 770-1 and therefore there is no tax loss included in the loss parcel for that year). The 2004, 2005 and 2007 income years will then be a new loss year for Loss Co (under subsection 770-1(2)), because Loss Co did not otherwise incur a tax loss in those years.

To avoid the operation of the deduction limit (under section 770-30), Loss Co chooses under paragraph 770-15(b) to reduce the starting total for the loss parcel to $10,000 by not converting $3,000 of its convertible foreign losses (which consists of $2,000 of the 2004 tax loss and $1,000 of the 2005 tax loss). Consequently, only the 2005 and 2007 income years are the new loss years for Loss Co.

770-25 Tax loss has foreign loss component

A tax loss an entity is taken to have under section 770-1 has a separate component (the foreign loss component ). The amount of the component is the amount of the convertible foreign loss.

770-30 Deduction limit for foreign loss component

(1) The amount of the foreign loss component of one or more tax losses in a loss parcel that any entity can deduct in an income year cannot exceed the amount worked out for the year using the table.

Note: There may be a reduction of the limit for the head company of a consolidated group under section 770-100.

(2) This section does not limit the amount of the foreign loss component of a tax loss that an entity can deduct in a year later than the third income year ending after the commencement year.

Note: For later years, any remaining undeducted tax loss may be deducted to the extent permitted by the general rules for tax losses.

770-35 Offset limit to take account of deducted foreign loss component

(1) This section affects the calculation of your offset limit for an income year under section 770-75 of the 1997 Act.

(2) This section applies for an income year if you have deducted an amount of the foreign loss component of one or more tax losses (see section 770-25) in the income year.

(3) In working out the amount referred to in subparagraph 770-75(2)(b)(ii) of the 1997 Act for the year, you must assume (in addition to the assumptions set out in subsection 770-75(4) of that Act), that you were not entitled to any deductions covered by subsection (2).

Subdivision 770-B - Transitional foreign losses (special rules for consolidated groups)

Table of sections

770-80 Transferred losses taken not to be refreshed for purposes of converting overall foreign loss

770-85 Deduction limit not to restrict transfer of losses

770-90 Transfer of losses not restricted where part of trial year occurs before commencement year

770-95 Foreign loss component and starting total retained after transfer to head company

770-100 Limit where foreign loss component utilised by joining entity

770-105 Modified operation of Subdivision 707-C of the 1997 Act for foreign loss component

770-110 Application of Subdivision to MEC groups

770-80 Transferred losses taken not to be refreshed for purposes of converting overall foreign loss

(1) This section applies if:

(a) a loss is transferred under section 707-120 of the Income Tax Assessment Act 1997 (the 1997 Act ) from a joining entity to a head company; and

(b) the loss is an overall foreign loss in respect of a class of assessable foreign income (within the meaning of former section 160AFD of the Income Tax Assessment Act 1936 (the 1936 Act )).

Note: Former section 160AFD of the 1936 Act allowed a past foreign loss to reduce assessable foreign income of the same class.

(2) In applying section 770-5, only have regard to the overall foreign loss if the income year in which it was actually incurred (disregarding subsection 707-140(1) of the 1997 Act) was one of the most recent 10 income years ending before the commencement year.

Note: Section 770-5 is about the amount of an entity's convertible foreign losses. Section 707-140 deems the head company of a group to have made a transferred loss in the year in which it is transferred.

(3) A reduction must be made under step 2 of the method statement in section 770-10 if the overall foreign loss was actually incurred (disregarding subsection 707-140(1) of that Act) in an income year other than the most recent 7 income years ending before the commencement year.

Note: Section 770-10 is about reducing an entity's past foreign losses to arrive at the entity's convertible foreign loss for past years.

770-85 Deduction limit not to restrict transfer of losses

Section 770-30 (deduction limit for foreign loss component) does not limit the transfer, under Subdivision 707-A of the 1997 Act, of a tax loss that has a foreign loss component.

770-90 Transfer of losses not restricted where part of trial year occurs before commencement year

Section 770-1 operates in relation to a trial year in the same way it operates in relation to the income years mentioned in subsection 770-1(3) if:

(a) a tax loss has a foreign loss component; and

(b) it is necessary to determine whether an entity could utilise the tax loss for an income year consisting of the trial year; and

(c) part of the trial year occurs before the start of the commencement year mentioned in subsection 770-1(3).

770-95 Foreign loss component and starting total retained after transfer to head company

Where a tax loss having a foreign loss component is transferred under Subdivision 707-A of the 1997 Act to a head company:

(a) the tax loss has the same amount of foreign loss component after the transfer as it had immediately before the transfer; and

(b) the starting total for the loss parcel to which the tax loss belongs (see section 770-20) is the same after the transfer as it was immediately before the transfer; and

(c) for the purposes of section 770-30, the amount of the foreign loss component of one or more of the tax losses in the parcel that any entity has deducted for an income year is the same after the transfer as immediately before the transfer.

Note 1: This section ensures a tax loss retains its foreign loss component, starting total and deduction history even though the head company is taken after the transfer to have made the loss for the income year in which the transfer occurs.

Note 2: Section 770-30 sets a limit on how much of an entity's past foreign losses may be deducted in each of the first 4 years after the commencement of this section.

770-100 Limit where foreign loss component utilised by joining entity

(1) This section applies where one or more tax losses having a foreign loss component are transferred under Subdivision 707-A of the 1997 Act to the head company of a consolidated group.

(2) The limit under subsection 770-30(1) of the amount of the foreign loss component of the tax losses that the transferee can deduct for an income year (the deduction year ) mentioned in an item in the table in that subsection is reduced by the amount (if any) worked out under subsection (3).

(3) The amount of the reduction is the sum of each amount of the foreign loss component that has been deducted by other entities in respect of a non-membership period mentioned in section 701-30 of the 1997 Act, or income year, ending before the end of the deduction year.

Note: Section 701-30 of the 1997 Act sets out how an entity that is not a subsidiary member of a consolidated group for all of an income year calculates its tax liability or tax loss for the periods (called non-membership periods) when it is not a member of a group.

770-105 Modified operation of Subdivision 707-C of the 1997 Act for foreign loss component

(1) This section affects the way in which one or more tax losses in a bundle of losses transferred under Subdivision 707-A of the 1997 Act can be utilised by the transferee in an income year if:

(a) one or more of the tax losses has a foreign loss component (regardless whether at the time of transfer the bundle included a tax loss having a foreign loss component or an overall foreign loss in respect of a class of income (within the meaning of former section 160AFD of the 1936 Act)); and

(b) section 770-30 limits the amount of the foreign loss component that the transferee can deduct in the income year.

(2) Subdivision 707-C of the 1997 Act does not limit the utilisation of the foreign loss component for the income year.

Note: This means that the available fraction does not apply to the foreign loss component of a tax loss in the first 4 years after commencement. Instead, the deduction limit in section 770-30 applies.

(3) For the purposes of working out under Subdivision 707-C of the 1997 Act how much of the tax losses in the bundle the transferee can utilise in the income year, section 707-310 of the 1997 Act has effect as if the first reference in paragraph (3)(b) of that section to the transferee's losses included a reference to the sum of the amounts of the foreign loss components for all loss parcels in the income year.

Note: This affects the limit that Subdivision 707-C of that Act sets on utilising other tax losses in the bundle (because that limit depends on the transferee's income and gains remaining after utilisation of losses that have not been transferred under Subdivision 707-A of that Act): see subsection 707-310(3) of that Act.

770-110 Application of Subdivision to MEC groups

This Subdivision has effect in relation to a MEC group in the same way in which it has effect in relation to a consolidated group.

Subdivision 770-C - Transitional foreign losses (special rules for CFCs)

Table of sections

770-160 Converting a past CFC loss

770-165 Convertible CFC loss

770-170 Reducing the amount of a CFC loss of a class of notional assessable income

770-160 Converting a past CFC loss

(1) The Income Tax Assessment Act 1936 (the 1936 Act ) operates for the purposes of the statutory accounting periods mentioned in subsection (2) as if an eligible CFC (within the meaning of Division 7 of Part X of that Act) (an eligible CFC ) that has a convertible CFC loss for an earlier statutory accounting period under section 770-165 has a loss for the earlier period equal to the amount of the convertible CFC loss.

Note: Part X of the 1936 Act deals with the attribution of the income of a CFC to attributable taxpayers.

(2) The statutory accounting periods are:

(a) the first statutory accounting period starting on or after the first 1 July that occurs after the day on which the Tax Laws Amendment (2007 Measures No. 4) Act 2007 receives the Royal Assent (the commencement period ); and

(b) later statutory accounting periods.

770-165 Convertible CFC loss

(1) An eligible CFC has a loss to which this section applies (a convertible CFC loss ) for an earlier statutory accounting period covered by subsection (2) if:

(a) the eligible CFC has a loss under section 426 of the 1936 Act for the earlier period in relation to notional assessable income of a class, reduced to the extent that it has been previously taken into account under section 431 of the 1936 Act in respect of a statutory accounting period before the commencement period; and

(b) a positive amount remains after reducing the loss under section 770-170.

Note: For the classes of notional assessable income, see former subsection 424(1) of the 1936 Act.

(2) The statutory accounting period must be one of the most recent 10 statutory accounting periods ending before the commencement period.

(3) The amount of the convertible CFC loss for the earlier period is the sum of the positive amounts remaining after each loss in relation to notional assessable income of a class for the earlier period is reduced under section 770-170.

770-170 Reducing the amount of a CFC loss of a class of notional assessable income

Apply the following method statement to each loss in relation to notional assessable income of a class for the earlier statutory accounting period.

Method statement

Step 1. Reduce the amount applicable under paragraph 770-165(1)(a) to the extent (if any) that the loss relates to the "all other amounts" class of notional assessable income, except to the extent (if any) that the loss is attributable to losses or outgoings incurred in gaining or producing income of a kind that would be the company's notional assessable income or sometimes-exempt income.

Step 2. For statutory accounting periods other than the most recent 7 statutory accounting periods ending before the commencement period - reduce the result of step 1 by half.

Subdivision 770-D - Transitional foreign income tax offsets (common rules)

Table of sections

770-220 Converting excess foreign tax credits into pre-commencement excess foreign income tax

770-225 Pre-commencement excess foreign income tax generated for a company by excess foreign tax credits relating to other income

770-230 Increase in the foreign income tax offset

770-220 Converting excess foreign tax credits into pre-commencement excess foreign income tax

(1) You have pre-commencement excess foreign income tax from an income year if:

(a) you have excess foreign tax credits in relation to a class of foreign income from an earlier income year under former section 160AFE of the Income Tax Assessment Act 1936 (the 1936 Act ); and

(b) the earlier income year is one of the most recent 5 income years ending before the first income year starting on or after the first 1 July that occurs after the day on which the Tax Laws Amendment (2007 Measures No. 4) Act 2007 receives the Royal Assent; and

(c) the credits have not already been applied under former section 160AFE of the 1936 Act.

Note: For the classes of income, see former subsections 160AF(7) and 160AFE(5) of the 1936 Act.

Former section 160AFE of the 1936 Act determined whether an entity had excess foreign tax credits for an income year and whether it could use them to increase the foreign tax credit amount in a later income year. Under the former foreign tax credit system, the excess credits were worked out and, where applicable, applied to increase the foreign tax credit amount in relation to each of the classes of income listed in former subsection 160AF(7).

(2) The amount of your pre-commencement excess foreign income tax from an income year is the sum of the amounts set out in the table in subsection (3) for that year.

(3) Column 2 of the following table specifies the class of income to which the excess foreign tax credits covered by subsection (1) relate. Column 3 sets the amount of pre-commencement excess foreign income tax from that income year generated by those excess foreign tax credits.

Note: Section 121EG of the 1936 Act applies the eligible fraction to assessable OB income, allowable OB deductions and foreign income tax paid on assessable OB income.

770-225 Pre-commencement excess foreign income tax generated for a company by excess foreign tax credits relating to other income

Reduce the amount of the excess foreign tax credits to the extent (if any) that they are attributable to foreign tax paid in respect of amounts that would be your non-assessable non-exempt income if they were derived in the commencement year.

770-230 Increase in the foreign income tax offset

(1) This section affects the amount of your tax offset under section 770-70 of the Income Tax Assessment Act 1997 (the 1997 Act ).

Note: That section determines how much tax offset you can claim for foreign income tax you have paid.

(2) Your tax offset for an income year (the current year ) is increased in accordance with this section if:

(a) the amount of your tax offset worked out under section 770-70 of the 1997 Act falls short of your offset limit under section 770-75 of that Act; and

(b) you have pre-commencement excess foreign income tax (see section 770-220) from an earlier year of income that is one of the most recent 5 income years ending before the current year.

(3) Increase your tax offset for the current year by adding your pre-commencement excess foreign income tax covered by paragraph (2)(b) to the amount of your tax offset worked out under section 770-70 of the 1997 Act.

(4) Only increase the offset to the extent of the shortfall worked out under paragraph (2)(a).

(5) You no longer have the pre-commencement excess foreign income tax to the extent that it has been used to increase your offset limit.

Subdivision 770-E - Transitional foreign income tax offsets (special rules for consolidated groups)

Table of sections

770-285 Objects of this Subdivision

770-290 Transferring subsidiary member's pre-commencement excess foreign income tax to head company

770-295 Where entity not subsidiary member for whole of income year

770-300 Pre-commencement excess foreign income tax lost on joining consolidated group

770-305 Exit history rule does not treat leaving entity as having pre-commencement excess foreign income tax

770-310 Application of Subdivision to MEC groups

770-285 Objects of this Subdivision

The main objects of this Subdivision are:

(a) to allow the head company of a consolidated group to apply, in relation to an income year, pre-commencement excess foreign income tax of an entity (the joining entity ) that becomes a subsidiary member of the group at a time (the joining time ) if:

(i) the income year starts at or after the joining time; and

(ii) that pre-commencement excess foreign income tax is from an income year ending before the joining time; and

(b) to prevent the joining entity from applying pre-commencement excess foreign income tax mentioned in subparagraph (a)(ii) to increase its own tax offset under Division 770 of the Income Tax Assessment Act 1997 (the 1997 Act ).

770-290 Transferring subsidiary member's pre-commencement excess foreign income tax to head company

(1) This section operates for the purposes of section 770-220 in relation to an income year if:

(a) an entity (the joining entity ) becomes a subsidiary member of a consolidated group at a time (the joining time ); and

(b) the joining time is before or at the start of that income year; and

(c) the joining entity has pre-commencement excess foreign income tax (the transferred foreign income tax ) from an earlier income year.

(2) For those purposes:

(a) the head company of the group is taken to have the transferred foreign income tax; and

(b) if, apart from paragraph (a), the head company has pre-commencement excess foreign income tax from the earlier year - the transferred foreign income tax is taken to be included in that pre-commencement excess foreign income tax.

(3) Subsection (2) also has effect for the purposes of a subsequent operation of this section.

770-295 Where entity not subsidiary member for whole of income year

(1) This section operates if:

(a) an entity (the joining entity ) is a subsidiary member of a consolidated group for some but not all of an income year (the joining year ); and

(b) there are one or more periods in the joining year (each of which is a non-membership period ) during which the entity is not a subsidiary member of any consolidated group.

Note: Section 701-30 of the 1997 Act treats each non-membership period as a separate income year for some purposes.

(2) Subsection (3) has effect for the purposes of section 701-30 of the 1997 Act in relation to the joining entity.

(3) In working out amounts for the joining entity under subsection 701-30(3) of the 1997 Act in relation to each non-membership period, assume that, if the joining year starts at the same time as the earliest of those non-membership periods, section 770-230 operates in relation to the joining entity for that non-membership period.

770-300 Pre-commencement excess foreign income tax lost on joining consolidated group

(1) For the purposes of section 770-220 in relation to an income year ending after the time an entity becomes a subsidiary member of a consolidated group, the entity is taken not to have any pre-commencement excess foreign income tax from an income year, or non-membership period described in section 701-30 of the 1997 Act, that ended before or at that time.

(2) Subsection (1) does not affect the operation of section 770-220 in accordance with section 770-290.

770-305 Exit history rule does not treat leaving entity as having pre-commencement excess foreign income tax

(1) This section operates in relation to an income year if:

(a) an entity (the leaving entity ) ceases to be a subsidiary member of a consolidated group before the end of that income year; and

(b) the head company of the group has pre-commencement excess foreign income tax from an earlier income year.

(2) To avoid doubt, the leaving entity is not taken because of section 701-40 of the 1997 Act (the exit history rule) to have that pre-commencement excess foreign income tax.

(3) It does not matter whether the head company has that pre-commencement excess foreign income tax because of section 717-10 of the 1997 Act or 770-290 (whether in relation to the leaving entity or another entity) or because of another provision.

770-310 Application of Subdivision to MEC groups

This Subdivision has effect in relation to a MEC group in the same way in which it has effect in relation to a consolidated group.