Consolidation Reference Manual

The Consolidation reference manual was last updated on 15 July 2011. It does not contain any changes to consolidation legislation that has occurred since that time and will not be updated in future. It cannot be relied on for currency of content. For any future consolidation changes, you will be able to access information from our consolidation home page or by visiting our 'New legislation' page.
You can still refer to the Consolidation reference manual for consolidation information that has not been impacted by changes in the legislation.

C3 Losses

C3-2 High-level worked example

C3-2-110 Consolidation loss provisions

Description

A joining entity's eligible losses are transferred to the head company at the joining time. The head company is then treated as having made the loss itself in the income year of the transfer. The use of transferred losses is limited by their available fraction - that is, they may be offset against only a fraction of the head company's income and gains. Subject to certain conditions, the available fraction for a bundle of losses [F1] transferred by a loss entity may be increased when the head company chooses to consolidate during the transitional period and the loss entity joins the consolidated group at the time that the consolidated group comes into existence.

Commentary

Subdivision 707-A sets out the rules for determining whether the joining entity's losses can be transferred to the head company. Subdivision 707-C outlines how much of a transferred loss may be deducted or applied by the head company. The transitional concessions available in relation to losses transferred to a consolidated group are contained in Subdivision 707-C, Income Tax (Transitional Provisions) Act 1997.

Example - facts

Assume the following consolidated group structure as at the joining time (1 July 2002).

Example - calculation

Loss transfer

How do ACo and BCo determine the amount of any transferable losses?

HCo, ACo and BCo all need to establish their tax position at the joining time (1 July 2002). This enables each entity to determine what unutilised losses they may have available for potential transfer to the head company.

Generally, in order to be transferable, each unutilised loss must have been able to be utilised by the joining entity had it remained outside the consolidated group.

At the joining time, ACo and BCo had the following losses that were eligible for potential transfer to HCo.

Table 1: Eligible losses of ACo and BCo at joining time
Subsidiary Loss Sort Year incurred
ACo $250 Net capital loss 2001
ACo $650 Tax loss 2000
BCo $350 Net capital loss 1998
BCo $300 Tax loss 2000

Have the joining entities maintained substantially the same ownership or the same business for the period since the loss was incurred until just after the joining time?

A loss is transferred from ACo or BCo to HCo to the extent that the loss could have been utilised by either ACo or BCo for an income year consisting of the trial year.

Assume ACo's 2000 tax loss satisfies the continuity of ownership test (COT) and the control test. It follows that ACo's 2001 net capital loss also satisfies these tests. Both losses can therefore be transferred to HCo.

BCo's 1998 net capital loss (pre-1999)

BCo experienced a change in its majority ownership on 27 July 1998. Therefore, the net capital loss that BCo made in the 1998 income year cannot satisfy the COT. BCo will only be able to transfer the loss to HCo if it satisfies a modified same business test (SBT).

As the capital loss was made in an income year beginning prior to 1 July 1999, BCo compares the business conducted immediately before the test time to the SBT period (or trial year [F2] ) to see if it satisfies the SBT for the loss, as shown in figure 3.

Assume that BCo's 1998 net capital loss satisfies the SBT and can therefore be transferred to HCo.

BCo's 2000 tax loss

Assume that BCo's 2000 tax loss satisfies the COT (as well as the control test) and can therefore be transferred to HCo.

Calculating the available fractions

What are the available fractions for each bundle of losses transferred to HCo in the absence of the value donor concession?

In this example, the calculation of the available fraction is as follows:

Modified market value of the loss company / Adjusted market value of the consolidated group

The adjusted market value of the consolidated group as at the joining time, ignoring any losses and assuming a nil franking account balance, is $800. Thus the available fractions are as follows:

Bundle A: 200 / 800 = 0.250
Bundle B: 100 / 800 = 0.125

HCo chooses to apply the value donor concession

As the HCo group consolidates during the transitional period and BCo has a $300 tax loss that is transferable to HCo under the existing group loss transfer rules contained in Division 170 of the Income Tax Assessment Act 1997 , a portion of HCo's modified market value can be added to BCo's modified market value for the purposes of working out the available fraction for bundle B. That portion is based on the amount of BCo's losses that are transferable to HCo as a proportion of BCo's total losses. (It should be noted that BCo's 1998 net capital loss of $350 is not transferable to HCo under the group loss transfer rules - it was incurred before BCo became a part of a wholly-owned group with HCo.) Thus the portion of HCo's modified market value that can be added to BCo's modified market value is:

$500 * 100% * (300/650) = $231

(If losses were also transferred from HCo to the consolidated group, its modified market value would then have to be reduced by the above amount for the purposes of calculating the available fraction for the bundle of losses transferred from HCo.)

As a result of the increase in BCo's modified market value, the available fraction for bundle B is calculated as follows:

((100 + 231) / 800) = 0.414

Note

This example is designed to illustrate the operation of the rules. The choices made by HCo here are not purported to represent the best outcome for the group in every case where similar scenarios may exist.

Utilisation of transferred losses

The HCo group's loss bundles are shown in table 2.

Table 2: HCo group loss bundles
Bundle Loss Available fraction (AF) Sort Basis of transfer Year incurred*
A $250 0.250 Net capital loss COT 2003
A $650 0.250 Tax loss COT 2003
B † $350 0.414 Net capital loss SBT 2003
B † $300 0.414 Tax loss COT 2003

* Losses that have been transferred to HCo are deemed to be made by HCo in the income year in which the transfer occurs.

† BCo's available fraction has been calculated using the value donor concession.

The HCo group has then traded for an income year. Prior to taking into account transferred losses, it determines that it has a capital gain of $500 and other assessable income, net of deductions (assuming no capital gains or assessable foreign or film income) of $1,800 for the 2003 income year. No other losses were incurred by the group during this period.

What is the taxable income position of the HCo group for the 2003 income year?

Assume that HCo has satisfied the COT (as well as the control test) to enable it to utilise its transferred losses for this income year.

Determine limits for utilisation of transferred losses

Step 1: Work out the categories of group income or gains - section 707-310(3)

Table 3: Categories of group income or gains (step 1)
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 $500 - - $500
Other assessable income $1,800 - - $1,800

Step 2: Calculate the fraction of the income/gain that is attributable to each bundle - subsection 707-310(3)

Table 4: Fraction of income/gains attributable to each bundle (step 2)
Column 1 income or gains Loss bundle Column 2 income/gains for bundle Multiplied by: AF AF amount for the bundle
Capital gains Bundle A $500 0.250 $125
Capital gains Bundle B $500 0.414 $207
Other assessable income Bundle A $1,800 0.250 $450
Other assessable income Bundle B $1,800 0.414 $745

Step 3(a) - Work out a notional taxable income for bundle A - subsection 707-310(2)

Table 5: Net capital gain (step 3a)
Capital gains $ Losses applied $
Capital gain 125 Transferred net capital loss 125
Total 125 Total 125

The (notional) net capital gain is $0 ($125 - $125).

Table 6: Taxable income (step 3a)
Assessable income $ Deductions $
Net capital gain 0 Transferred tax loss 450
Other assessable income 450
Total 450 Total 450

Transferred losses 'used' in working out notional taxable income for bundle A are:

• transferred net capital loss $125
• transferred tax loss $450

These are the limits for utilisation of these transferred losses when determining the actual taxable income for the group.

Step 3(b) - Work out a notional taxable income for bundle B - subsection 707-310(2)

Table 7: Net capital gain (step 3b)
Capital gains $ Losses applied $
Capital gain 207 Transferred net capital loss 207
Total 207 Total 207

The (notional) net capital gain is $0 ($207 - $207).

Table 8: Taxable income (step 3b)
Assessable income $ Deductions $
Net capital gain 0 Transferred tax loss 300
Other assessable income 745
Total 745 Total 300

The (notional) taxable income is $445 ($745 - $300).

Transferred losses 'used' in working out notional taxable income for bundle B are:

• transferred net capital loss $207
• transferred tax loss $300

These are the limits for utilisation of these transferred losses when determining the actual taxable income for the group.

Determine group's actual taxable income

Table 9: Net capital gain
Capital gains $ Losses applied $
Capital gain 500 Transferred net capital loss (bundle A) 125
Transferred net capital loss (bundle B) 207
Total 500 Total 332

The group's net capital gain is $168 ($500 - $332).

Table 10: Taxable income
Assessable income $ Deductions $
Net capital gain 168 Transferred tax loss (bundle A) 450
Other assessable income 1,800 Transferred tax loss (bundle B) 300
Total 1,968 Total 750

The group's taxable income is $1,218 ($1,968 - $750).

The loss bundles as at the end of the 2003 income year contain the losses shown in table 11.

Table 11: Losses in loss bundles
Bundle Loss Available fraction Sort Basis of transfer Year incurred
A $125 (i.e. $250 - $125) 0.250 Net capital loss COT 2003
A $200 (i.e. $650 - $450) 0.250 Tax loss COT 2003
B $143 (i.e. $350 - $207) 0.414 Net capital loss SBT 2003

Note: the whole amount of tax loss of $300 for bundle B is fully utilised.

References

Income Tax Assessment Act 1997 , Subdivisions 707-A , 707-C ; as amended by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 1

Income Tax (Transitional Provisions) Act 1997 , Subdivision 707-C ; as amended by New Business Tax System (Consolidation) Act (No. 1) 2002 (No. 68 of 2002), Schedule 2

Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002 , Chapters 6, 8 and 9

Current at 2 December 2002

[F1]
A bundle of losses consists of all the losses that are transferred to the head company for the first time by the entity that actually made them.

[F2]
Although the trial year ends just after the joining time, the SBT period effectively ends immediately before the joining time. This is achieved by assuming that the business carried on by the joining entity at and just after the joining time is the same as the business it carried on just before the joining time.


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).