ATO Interpretative Decision
ATO ID 2003/971
Income Tax
Consolidation: losses - transferee's adjusted market valueFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the market value attributable to losses transferred to the transferee at the initial transfer time, ignored in determining the transferee's adjusted market value at that time for the purposes of subsection 707-320(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. Any market value attributable to losses transferred to the transferee at the initial transfer time, is ignored in determining the transferee's adjusted market value at that time for the purposes of subsection 707-320(1) of the ITAA 1997. This is because losses do not contribute to the group's earning capacity.
Facts
Company A, and its wholly owned subsidiary, Company B form a consolidated group on 1 July 2003.
Company B has unused losses from a prior income year.
A bundle of losses is formed when losses are transferred (note 1) from Company B to Company A, the head company of the consolidated group at the joining time.
Reasons for Decision
The head company of a consolidated group (the transferee) is required to calculate the available fraction for this bundle of losses where at least one of the losses in the bundle is not a concessional loss.
The available fraction for a bundle of losses is calculated in accordance with the formula in subsection 707-320(1) of the ITAA 1997. The denominator in that formula requires the ascertainment of the adjusted market value of the head company (note 2) at the initial transfer time.
The adjusted market value of the transferee at the initial transfer time is its market value as at that time, subject to certain assumptions stated in subsection 707-320(1) of the ITAA 1997. One of these assumptions is that 'the transferee did not have a loss of any sort for an income year ending before that time'.
Under section 707-115 of the ITAA 1997, only losses that have been made for an income year ending before the joining time may be transferred to the head company of a consolidated group (note 3). It follows that any loss transferred to the head company at the initial transfer time must be for an income year ending before that time. This is the case notwithstanding the fact that, under subsection 707-140(1) of the ITAA 1997, the Act is to operate as if the head company had made the loss for the income year in which the transfer occurs.
Subsection 707-140(1) of the ITAA 1997 applies for the purposes of income years ending after the joining time. It enables the head company to use the transferred loss (subject to limitations) in working out its taxable income. However, that subsection does not seek to undo the fact that the loss was actually incurred in an earlier income year - an income year which ended before the initial transfer time. Consequently, under subsection 707-320(1) of the ITAA 1997, for the purposes of determining the head company's adjusted market value at the initial transfer time, it must be valued as if it had no such losses.
This interpretation is consistent with the explanation contained in paragraph 8.81 of the Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, which states:
The
adjusted market value
of the head company to which the losses are initially transferred (i.e. the transferee) is the head company's market value at the transfer time, ignoring any losses it has and assuming that its franking account balance is nil. The value of these attributes is ignored because they did not contribute to the group's earning capacity.
Accordingly, under the formula, Company A's adjusted market value at the initial transfer time must be worked out as if Company A did not have any losses for prior income years, even though Company B has transferred such losses to it.
Note 1: Subject to the transfer tests contained in Subdivision 707-A of the ITAA 1997.
Note 2: Under the single entity principle the value of the head company includes the value of subsidiaries including the loss entity.
Note 3: Under subsection 701-30(8) of the ITAA 1997, a non-membership period loss is treated as a loss for an income year ending at the end of the non-membership period.
Date of decision: 1 October 2003Year of income: 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
subsection 701-30(8)
section 707-115
subsection 707-140(1)
subsection 707-320(1)
Subdivision 707-A
Other References:
Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002
Keywords
Adjusted market value of the consolidated group
Available fraction
Bundle of losses
Consolidation
Consolidation - joining
Consolidation - losses
Transferred losses
Utilise a loss
ISSN: 1445-2782
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
