Consolidation Reference Manual
You can still refer to the Consolidation reference manual for consolidation information that has not been impacted by changes in the legislation.
C3 Losses
C3-4 Worked example - loss utilisation
Amount that can be utilised
C3-4-430 Amount of losses that can be utilised - transferred tax losses utilised before group tax losses
Description
This example shows:
- •
- how to determine the limits for utilisation of losses transferred to a head company, and
- •
- in a situation where there are both group tax losses and transferred tax losses, how these losses are applied in calculating a group's actual taxable income.
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- loss bundles and calculating the available fraction → 'Treatment of losses', C3-1 ; 'Consolidation loss provisions', C3-2-110 (high-level worked example)
Commentary
The available fraction for a loss bundle is applied to each category of group income or gains as reduced by any relevant deductions, including group losses (that is, losses generated by the consolidated group as opposed to transferred losses). The results are taken to be the head company's only income or gains of each type. Based on that assumption, the head company works out the maximum amount of losses of each sort it can use from the loss bundle.
In working out the group's taxable income, the 'earliest losses first' rule ( → subsection 36-17(7), Income Tax Assessment Act 1997) applies if there is a choice between using transferred tax losses and group tax losses.
As shown in this example, there are some circumstances where transferred tax losses are able to be utilised before group tax losses.
Example
Facts
A group consolidates on 1 July 2002 and is working out its taxable income for the 2005 income year.
The group's income for the 2005 income year is shown in table 1.
| Income | Amount ($) | |
|---|---|---|
| Capital gains | 1,300 | (current year capital losses of $200) |
| Other assessable income | 2,000 | (deductions of $1,700) |
The group's losses (group losses) are shown in table 2.
| Sort | Amount ($) | Year incurred |
|---|---|---|
| Net capital loss | 100 | 2003 |
| Tax loss (not film) | 1,500 | 2004 |
The group's remaining transferred loss (in a loss bundle with an available fraction of 0.300) is a transferred tax loss (not film) of $250, which was transferred to the head company when the group consolidated in the 2003 income year.
The transferred tax loss is to be utilised using the available fraction method.
The head company satisfies the recoupment tests for utilisation of the transferred tax loss.
Calculation
A. Determine limit for utilisation of transferred tax loss
Step 1: Work out the categories of group income or gains - subsection 707-310(3)
| Column 1 | Income or gains | Gross amount ($) | Less: allowable deductions / reductions ($) | Less: group / concessional losses of that kind ($) | Column 2 | Income / gains available for bundle ($) |
|---|---|---|---|---|---|---|
| Capital gains | 1,300 | 200 | 100 | 1,000 | ||
| Other assessable income | 2,000 | 1,700 | 300 | nil |
Although the group tax loss is $1,500, only $300 needs to be deducted as this reduces the other assessable income category to nil.
Step 2: Calculate the fraction of the income/gains that is attributable to the bundle - subsection 707-310(3)
| Column 1 Income or gains | Column 2 Income / gains available for bundle | Multiplied by: available fraction (AF) | AF amount for the bundle |
|---|---|---|---|
| Capital gains | $1,000 | 0.300 | $300 |
| Other assessable income | $0 | 0.300 | $0 |
Step 3: Work out a notional taxable income for the bundle - subsection 707-310(2)
| Capital gains | $ | Losses applied | $ |
|---|---|---|---|
| Capital gain | 300 | Transferred net capital losses | 0 |
| Total | 300 | Total | 0 |
The notional net capital gain is $300 ($300 - nil).
| Assessable income | $ | Deductions | $ |
|---|---|---|---|
| Net capital gain | 300 | Transferred tax loss (not film) | 250 |
| Other assessable income | 0 | ||
| Total | 300 | Total | 250 |
The notional taxable income is $50 ($300 - $250).
Transferred losses 'used' in working out the notional taxable income for the bundle are:
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- transferred tax loss (not film) $250
This is the limit for utilisation of this transferred tax loss when determining the actual taxable income for the group.
B. Determine group's actual taxable income
| Capital gains | $ | Losses applied | $ |
|---|---|---|---|
| Capital gains | 1,300 | Current year net capital losses | 200 |
| Group net capital loss | 100 | ||
| Total | 1,300 | Total | 300 |
The group's net capital gain is $1,000 ($1,300 - $300).
| Assessable income | $ | Deductions | $ |
|---|---|---|---|
| Net capital gain | 1,000 | Deductions | 1,700 |
| Other assessable income | 2,000 | Transferred tax loss (not film) | 250 |
| Group tax loss (not film) | 1,050 | ||
| Total | 3,000 | Total | 3,000 |
As the transferred tax loss is treated as having been incurred in the 2003 income year, it is fully deducted before deducting any of the group tax loss incurred in the 2004 income year. There is no specific consolidation provision to override the 'earliest losses first' rule in this situation.
References
Income Tax Assessment Act 1997, subsection 36-15(5)
Income Tax Assessment Act 1997, section 707-310; as amended by New Business Tax System (Consolidation) Act (No.1) 2002 (No. 68 of 2002), Schedule 1
Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, Chapter 8
History
Revision history
Section C3-4-430 first published 2 December 2002.
Further revisions are described below.
| Date | Amendment | Reason |
|---|---|---|
| 10.12.04 | Insert sentence in 'Commentary' clarifying the applicability of the worked example, particularly in relation to the order in which tax losses must be utilised. | Clarification. |
Proposed changes to consolidation
Proposed changes to consolidation announced by the Government are not incorporated into the Consolidation reference manual until they become law. In the interim, information about such changes can be viewed at:
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- http://assistant.treasurer.gov.au (Assistant Treasurer's press releases)
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- www.treasury.gov.au (Treasury papers on refinements to the consolidation regime).
Current at 10 December 2004.