House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 6 - Losses - technical amendments

Outline of chapter

6.1 This chapter explains various amendments to the rules dealing with the transfer and utilisation of losses. They ensure that:

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ownership changes in an entity that result in it joining a consolidated group are taken into account in working out its taxable income for the period up to the joining time;

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non-membership period losses can be transferred and utilised;

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in some cases, the capital injection rules can be ignored in applying the value donor rules;

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losses continue to be transferable under the FC(TAL) Act; and

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a minor referencing error in the Dictionary amendments made by the May Consolidation Act is corrected.

6.2 Rules that modify the COT and SBT for MEC groups are discussed in Chapter 3.

6.3 References in this chapter are to the ITAA 1997, unless otherwise indicated.

Context of reform

6.4 The amendments refine the losses rules introduced previously. The value donor amendments are the result of consultation. The amendments to the FC(TAL) Act complete the rules needed to ensure that loss transfers involving a foreign bank branch can continue under Division 170 (despite the introduction of the consolidation regime).

Summary of new law

6.5 The first 2 amendments relate to a subsidiary member's calculation of its taxable income or loss for a 'non-membership period'. An entity may be a subsidiary member of a group for only part of an income year (e.g. because it joins or exits the group part way through the income year). A part of the year during which it is not a subsidiary member is called a non-membership period. The entity may have more than one non-membership period for an income year (see section 701-30).

Ownership changes at the joining time

6.6 In applying the COT for the purpose of determining whether an entity can recoup its losses for a non-membership period that ends just before it joins a consolidated group, the period is extended so it ends at the joining time.

Transfer and utilisation of non-membership period losses

6.7 A loss made by an entity in any non-membership period will be treated as a loss for the purpose of provisions dealing with the transfer and utilisation of losses. These include:

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loss transfers under Division 170 in the income year during which consolidation occurs;

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loss transfers involving an Australian branch of a foreign bank (which may continue under Division 170 despite the introduction of the consolidation regime); and

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loss transfers to a consolidated group under Division 707 and their subsequent utilisation by the group.

Amendments to the value donor rules

6.8 There are 2 amendments to the value donor rules contained in the IT(TP) Act 1997.

6.9 The first waives all intra-group capital injections and non-arm's length transactions in applying the value donor rules. It is referred to in this explanation as the group waiver rule. It only applies if all parties to the injections and transactions were group members and broadly, if every loss transferred to the group on its formation by a joining member could have been transferred to every other group member under Division 170.

6.10 The second ignores an injection or transaction involving 2 group members (and is referred to as the single waiver rule). It applies if the 2 members satisfy the value donor conditions.

FC(TAL) Act loss transfers to foreign bank branch

6.11 A tax loss or net capital loss transferred to the head company of a consolidated group under Subdivision 707-A can be transferred by the head company under Schedule 1 or 2 to the FC(TAL) Act. The loss must be incurred by an entity (the real loss-maker) that would have satisfied the conditions for transfer had it not joined the consolidated group. Further, for the purposes of the FC(TAL) Act, the head company will be taken to have incurred the loss for the income year in which the real loss-maker incurred the loss.

6.12 The relaxed SBT in section 26C of the FC(TAL) Act that applies to a transferring corporation will also apply to a head company that satisfies the conditions for transfer of a Subdivision 707-A loss under that Act.

Detailed explanation of new law

Ownership changes at the joining time

6.13 An entity's non-membership period will be extended to include the time just after the end of that period for the purpose of determining whether a loss can be claimed by the entity for the period. This ensures that any ownership changes in the entity that occur at the time it becomes a subsidiary member of a consolidated group are taken into account in determining whether it can claim a loss for the non-membership period. [Schedule 19, item 1, subsection 701-30(3A)]

Why is the period being extended?

6.14 Currently, the period ends just before the joining time. This means ownership changes in an entity at the time it joins a consolidated group as a subsidiary member may not be taken into account in determining whether the entity can use its losses in working out its taxable income up to the joining time. That is, those changes may not be taken into account in applying the COT as a recoupment test in working out the entity's final pre-consolidation taxable income.

6.15 However, such changes are specifically taken into account in applying the COT as a transfer test (as a result of the definition of trial year). That is, in determining whether a joining entity's losses can be transferred to the consolidated group. This means a loss may pass the COT when used as a recoupment test up to the joining time, but fail it when used as a transfer test.

6.16 Therefore, the amendment will synchronise the application of the COT as a recoupment test (for a pre-joining period) with its application as a transfer test.

Which losses does the rule apply to?

6.17 This rule applies to the entity's use of the following losses in working out its the pre-joining time taxable income:

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a loss made by the entity (without a transfer under Subdivision 707-A) for an earlier income year [Schedule 19, item 1, subparagraph 701-30(3A)(b)(i)]:

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that is, a loss made by the entity as a single entity or as the head company of a consolidated group for an income year that ends before the start of the non-membership period;

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a loss transferred to the entity during an earlier income year [Schedule 19, item 1, subparagraph 701-30(3A)(b)(ii)]:

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that is, a loss transferred to the entity under Subdivision 707-A in an income year that ends before the start of the non-membership period; and

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a loss transferred to the entity in the non-membership period [Schedule 19, item 1, paragraph 701-30(3A)(a)]:

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that is, a loss transferred to the entity under Subdivision 707-A (because the entity was a head company) or under Division 170.

6.18 Therefore, the rules also apply to losses made by, or transferred to, the head company of a consolidated group that becomes a subsidiary member of another consolidated group.

Example 6.1

The head company of a consolidated group, acquires 100% of the membership interests of Sub Co on 1 September 2002 (the joining time). Sub Co has a prior year tax loss made in the year ended 30 June 2002 and will need to determine whether it can utilise this loss in working out its taxable income for the non-membership period 1 July 2002 to 31 August 2002.

Applying the rule in subsection 701-30(3A), the non-membership period of 1 July 2002 to 31 August 2002 will now include the time just after the end of that period as if it were the end of the income year [Schedule 19, item 1, subsection 710-30(3A)] . The ownership test period under subsection 165-12(1) will therefore be the period 1 July 2001 to 1 September 2002.

In testing for ownership changes, the 100% change that occurred on 1 September 2002 will fall within the ownership test period and cause the COT to be failed. In order to utilise the loss for the non-membership period, Sub Co will need to pass the SBT.

The extension does not affect the application of the SBT

6.19 In applying the SBT to determine whether a company can use a loss for a non-membership period, the company is taken to have carried on at the time just after the end of the non-membership period the same business it carried on just before that time. [Schedule 19, item 1, subsection 701-30(3A)]

6.20 In the absence of this rule, it may be argued that the extension of the non-membership period (so it ends at the joining time) means the business carried on by the entity for that period includes the business carried on by the group. The rule matches subsection 707-120(3) which applies in determining whether a loss can be transferred to a consolidated group.

6.21 A company that fails the COT may use its loss if the business it carries on during the income year (or non-membership period) in which it seeks to use the loss is the same as the one it carried on immediately before the COT failure.

Transfer and utilisation of non-membership period losses

6.22Section 701-30 will be amended to ensure that for the purpose of provisions dealing with the transfer and utilisation of losses, any non-membership period loss is treated as a loss for an income year that started at the start of the period and ended at the end of the period. [Schedule 19, item 2, subsection 701-30(8)]

6.23 For all other purposes (i.e. entity core purposes), only a non-membership period loss incurred in a non-membership period which ends at the end of an income year is a loss for the income year. This means that a non-membership period loss generated by an entity in the last period in an income year (i.e. after it leaves a consolidated group) will be the only loss which is carried forward by the entity to the next income year. [Schedule 19, item 2, subsection 701-30(9)]

6.24 The effect of these amendments on specific loss transfer and utilisation provisions is discussed in paragraphs 6.27 to 6.31.

Why is the amendment necessary?

6.25 A loss may be generated for any non-membership period. However, currently only a loss made for a non-membership period that ends at the end of the income year is an actual loss for the income year - see subsection 701-30(7).

6.26 There is currently a rule in section 707-405 which ensures that a non-membership period loss made for a period that ends just before the joining time is a loss that can be transferred to the group under Subdivision 707-A. However, there is, for example, no equivalent rule to allow such a loss to be transferred under Division 170. This is contrary to the policy that Division 170 continue to be available up to the end of the transitional period (and in an ongoing sense for transfers involving a foreign bank branch).

Non-membership period loss: Division 170 transfer

6.27 An earlier non-membership period loss will nevertheless be available for use under Division 170 in its previous form, or in its ongoing limited application to transfers involving Australian branches of foreign banks.

6.28 In the final year in which transfers are potentially available for use under Division 170 (before it commences operation in its limited form), and where consolidation occurs part way during the income year, a non-membership period loss may be generated in the earlier period prior to consolidation. This earlier loss is potentially available for transfer and in calculating the income tax liability of the transferee for the entire income year, regardless of the fact that the loss is not generated in a period which ends at the end of the income year. [Schedule 19, item 2, subsection 701-30(8); item 6, subitem 39(10) of the May Consolidation Act]

Example 6.2

Head Co consolidates Walton Group from 1 July 2002. All the members of the group have a SAP of 1 January to 31 December.

Francis Co becomes a subsidiary member of Walton Group on 1 July 2002. It exits the group on 1 October 2002.

Taxable income or loss for each non-membership period must be calculated separately in determining the income tax position of Francis for its 2002-2003 income year.

In the period up to 30 June 2002, Francis makes a non-membership period loss of $100. This loss is transferred to another subsidiary of Walton Group, Crease Co, under Division 170. Because the loss has been transferred under Division 170, it is not available for transfer to the Walton Group under Subdivision 707-A.

Crease Co offsets the loss in determining its taxable income for the year 2002-2003 and in respect of its own non-membership period ending at 30 June 2002.

During the period of consolidation between 1 July 2002 and 30 September 2002, Francis has no taxable income or loss due to the operation of the single entity rule.

In the period between 1 October 2002 and 31 December 2002, Francis makes a further non-membership period loss. This loss is the actual tax loss for the income year 2002-2003. It can be carried forward by Francis to the next income year. It may subsequently be recouped by Francis or transferred to the head company of another consolidated group of which Francis becomes a member.

Non-membership period loss: Subdivision 707-A transfer and utilisation

6.29 This aspect was previously governed by section 707-405. That provision has been repealed and this aspect will now be governed by the new subsections 701-30(8) and (9). [Schedule 19, items 2 and 3]

6.30 Section 707-405 ensured that:

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a non-membership period loss that was not a loss for an income year under subsection 701-30(7) could nonetheless be transferred to a consolidated group under Subdivision 707-A; and

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in determining whether any non-membership period loss could be transferred under Subdivision 707-A it was tested from the start of the non-membership period (rather than the start of the income year in which the non-membership period occurred):

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this test period was also relevant to determining whether the loss could be utilised by the group if the rules in section 707-210 apply.

6.31 The new rules in subsections 701-30(8) and (9) achieve the same outcome as section 707-405. However, because they are expressed as applying to any provisions relating to the transfer or utilisation of a loss, they are broader in 2 respects:

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first, they apply to all of the consolidation rules in Part 3-90, including the rules in Subdivision 719-F that modify the consolidation loss rules for MEC groups; and

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second, they apply to rules outside Part 3-90, including the loss recoupment rules in Division 165:

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this means, for example, that a company that makes a non-membership period loss after leaving a consolidated group tests its ability to later use that loss as though the loss year started at the start of the non-membership period.

[Schedule 19, item 2, subsections 701-30(8) and (9)]

Example 6.3

Sub Co is a member of a consolidated group from 1 July 2003 until it exits on 1 January 2004. Sub Co's non-membership period starts on 1 January 2004 and ends on 30 June 2004. Assume Sub Co makes a loss for this period.

Sub Co's ownership test period in respect of the loss starts on 1 January 2004 (and not 1 July 2003). Therefore, in determining whether Sub Co can claim the loss, say in its 2004-2005 income year, it tests its ownership from the time it exits the group.

In the absence of the increased coverage of the rules for non-membership period losses, Sub Co's ownership test period would start on 1 July 2003 (i.e. the actual start of the income year in which the loss was made). This is clearly inappropriate given that the loss did not commence to be generated until after that. In any event, it would not be clear which entity should be tested given that, for the period of its membership of the group, Sub Co is treated as a part of the group's head company.

Amendments to the value donor rules

6.32 There are 2 amendments to the value donor rules contained in the IT(TP) Act 1997. The amendments are referred to in this explanation as the group waiver rule and the single waiver rule.

6.33 The group waiver rule waives the effect of the capital injection rules in section 707-325 in respect of injections and transactions involving group members (provided no entities external to the group are also involved). The single waiver rule waives the effect of the capital injection rules in respect of injections and transactions involving 2 group members only. It may apply to groups unable to satisfy the conditions of the group waiver rule.

Why are the group and single waiver rules being introduced?

6.34 The rules are being introduced in response to submissions received in relation to the May Consolidation Act.

6.35 Broadly, the value donor rules allow the available fraction for losses transferred to a consolidated group by a company (the real loss-maker) to be increased by the value of another group member (the value donor) to which the real loss-maker could have transferred the losses under the previously applicable group loss rules in Division 170.

6.36 The integrity of the available fraction is maintained by excluding an increase in a loss entity's value resulting from an injection of capital into the entity or a non-arm's length transaction involving the entity before the entity joins the group (see subsections 707-325 (2) to (5)).

6.37 However, it may be inconsistent to exclude an 'injection' of value from another group member (under the capital injection rules) and yet recognise and facilitate a 'donation' of value (under the value donor rules). The introduction of the rules will improve consistency between the capital injection and value donor rules.

6.38 The amendments apply in a limited set of circumstances. The complex nature of the value donor rules, which effectively overlay the operation of the existing loss transfer rules onto the consolidation losses rules, means the scope of the group and single waiver rules cannot be broadened without either undermining the integrity of the consolidation losses rules or adding an unworkable amount of complexity to the law.

Which losses do the rules apply to?

6.39 The value donor rules, and therefore the group and single waiver rules, only apply to tax losses (including film losses) and net capital losses. That is, the utilisation of an overall foreign loss (as defined in section 160AFD of the ITAA 1936) is not affected by these rules. [Schedule 19, item 4, paragraph 707-326(1)(b); item 5, subsection 707-328A(6)]

Group waiver rule

6.40 The group waiver rule ignores the effect that the capital injection rules would otherwise have in respect of these events in working out an available fraction for the real loss-maker's losses:

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a pre-consolidation injection of capital into a group member by another group member; and

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a non-arm's length transaction involving only group members.

[Schedule 19, item 5, subsections 707-328A(1) and (3)]

6.41 That is, there is no need to reduce a group member's modified market value by an increase in that value that flows from an event listed in paragraph 6.40. This means those increases continue to be reflected in a member's modified market value. However, this rule essentially only applies if all other group members can in any event donate their value and losses to the real loss-maker under the value donor rules.

Group waiver rule: choice

6.42 The head company of a consolidated group can choose to apply the group waiver rule if all the conditions listed in paragraph 6.44 are satisfied at the group formation time. The choice cannot be amended or revoked and must be made by the day on which the head company lodges its income tax return for the first income year for which it utilises losses transferred to it. [Schedule 19, item 5, paragraph 707-328A(1)(d) and subsection 707-328A(4)]

6.43 The choice is made in respect of a single group member that transferred its own losses to the head company on formation under Subdivision 707-A (i.e. the real loss-maker).

Group waiver rule: conditions

6.44 The conditions are:

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all members of the group at the formation time are companies [Schedule 19, item 5, paragraph 707-328A(1)(c)]:

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none of the members can be trusts because the value donor rules do not apply to trust losses;

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the group's head company chooses (under the value donor rules) for the available fraction for the real loss-maker's loss bundle to be worked out taking into account the modified market value of every other group member [Schedule 19, item 5, paragraph 707-328A(1)(a) and subsection 707-328A(2)]:

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that is, all other group members can and do 'donate' value to the real loss-maker under section 707-325 of the IT(TP) Act 1997;

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the head company chooses to treat any losses transferred to it on formation by the value donors as if they were included in the real loss-maker's bundle [Schedule 19, item 5, paragraph 707-328A(1)(b)]:

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that is, value donors 'donate' all their losses to the real loss-maker's bundle under section 707-327 of the IT(TP) Act 1997; and

•

none of the group members have had a capital injection or a non-arm's length transaction involving an entity that did not become a member of the group on formation [Schedule 19, item 5, paragraph 707-328A(1)(d)]:

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in the absence of this rule, the real loss-maker's available fraction could be inflated by moving value into the group from outside.

Group waiver rule: its effect

6.45 Essentially, if all the conditions are met, all of the group's tax losses and net capital losses will be used according to the real loss-maker's available fraction. Further, that fraction will be worked out on the basis of the real loss-maker's modified market value plus the modified market value of the other group members (up to the maximum extent permitted by the value donor rules).

6.46 However, to avoid doubt, it is specifically stated that the rule can operate only in relation to one bundle of losses transferred to the group's head company under Subdivision 707-A. That is, the rule cannot be used in working out an available fraction for a bundle of losses transferred by a value donor. [Schedule 19, item 5, subsection 707-328A(7)]

Group waiver rule: working out an available fraction for a value donor

6.47 Generally no available fraction will be needed in respect of a value donor's own losses. This is because they will have been donated to the real loss-maker's bundle and so used by the group in accordance with the real loss-maker's available fraction.

6.48 However, a value donor available fraction must be worked out in some limited circumstances:

•

if the value donor transferred foreign losses (because the value donor and group waiver rules only apply to tax losses and net capital losses) [Schedule 19, item 5, subsection 707-328A(6)]:

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the value donor available fraction is worked out on the basis of the value donor's modified market value (which will include adjustments for capital injections and non-arm's length transactions); and

•

if the value donor transferred any losses that were used by the group in accordance with the COT concession in section 707-350 of the IT(TP) Act 1997 and for which the concession was lost as a result of them being transferred to a new group [Schedule 19, item 5, subsection 707-328A(5)]:

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the value donor available fraction is worked out on the basis of the value donor's modified market value (which will include adjustments for capital injections and non-arm's length transactions) less any value it donated to the real loss-maker - also see subsection 707-325(8) of the IT(TP) Act 1997.

Example 6.4: Group waiver rule

On 1 July 2003, Head Co chooses to form a consolidated group that comprises Head Co, X Co and Y Co. On formation, X Co and Y Co transfer tax losses to Head Co.

Head Co and X Co satisfy the conditions for transferring their value to Y Co. Also, X Co meets the conditions for its transferred losses being treated as part of Y Co's bundle of transferred losses.

Prior to formation, Head Co injected capital into both X Co and Y Co. Also, X Co injected the capital it received from Head Co into Y Co.

Because the only injections are entirely intra-group, Head Co can choose to apply the group waiver rule. This means the modified market value of each group member is worked taking account of the effect of the capital injections.

Also, the available fraction for Y Co's loss bundle is worked out taking into account the modified market values of both Head Co and X Co. Also, X Co's bundle of losses is utilised as if it were in Y Co's bundle of losses.

Single waiver rule

6.49 The single waiver rule ignores the effect that the capital injection rules would otherwise have in respect of capital injections and non-arm's length transactions as between a real loss-maker and a value donor. [Schedule 19, item 4, subsections 707-326(1) and (2)]

6.50 The rule may apply more than once within a consolidated group because it looks individually at each real loss-maker and value donor relationship within the group.

Single waiver rule: condition

6.51 The rule applies if there is either:

•

a injection of capital directly into the real loss-maker by the value donor [Schedule 19, item 4, subsection 707-326(3)] ; or

•

a non-arm's length transaction involving only the real loss-maker and the value donor [Schedule 19, item 4, subsection 707-326(4)] .

6.52 Nonetheless, the rule does not apply if the capital injection rules have applied to the value donor in respect of events involving the value donor and an entity that is not the real loss-maker. That is, if capital has been injected into the value donor by an entity that is not the real loss-maker or there has been a non-arm's length transaction involving the value donor and an entity that is not the real loss-maker. [Schedule 19, item 4, subsection 707-326(5)]

6.53 In the absence of this exclusion, a value donor could be used as a vehicle to pass value to a real loss-maker from another entity that is not itself a value donor of the real loss-maker. For that reason, the exclusion applies to events involving the value donor and another entity, regardless of whether the other entity is a member of the group.

Single waiver rule: its effect

6.54 Where the conditions are met, the modified market value of the real loss-maker is not adjusted to exclude an increase in value caused by an event involving the value donor. The following example illustrates the application of the single waiver rule, including its interaction with the group waiver rule.

Example 6.5: Single waiver rule

Using the same facts as Example 6.4, assume an entity outside the group, Z Co, made an injection of capital into X Co prior to the formation time. As a result of this injection, the group is unable to meet the conditions for applying the group waiver rule.

However, the single waiver rule can be applied with respect to Y Co (the real loss-maker) and Head Co (the value donor). This means Y Co's modified market value is worked out taking into account the increase in that value as a result of the capital injection from Head Co.

As X Co received a capital injection from Z Co, the single waiver rule cannot be applied in respect of the capital injection from X Co into Y Co. That is, any increase in Y Co's modified market value arising from the injection from X Co will be excluded.

Further, as X Co is also a real loss-maker, it can apply the single waiver rule in respect of the injection of capital it received from its value donor, Head Co. However, the capital injection rules would continue to operate to exclude any increase in X Co's modified market value arising from the capital injection from Z Co.

Minor referencing correction

6.55 The reference in the amendments to the definition of test time in item 34 of Schedule 5 to the May Consolidation Act should be to section 166-85 and not 166-86. [Schedule 19, item 7]

Application and transitional provisions

6.56 These measures will take effect on 1 July 2002, along with other aspects of the consolidation measure.

Consequential amendments

6.57 The FC(TAL) Act will be amended to ensure that losses that would have been transferable by a subsidiary of a foreign bank, will continue to be transferable by a consolidated group of which the subsidiary becomes a member.

Why are the amendments necessary?

6.58 Schedules 1 and 2 to the FC(TAL) Act allow tax losses and net capital losses to be transferred from a subsidiary of a foreign bank to an Australian branch of the bank. Only pre-commencement losses may be transferred. They are losses made for the income year in which the FC(TAL) Act commenced, or an earlier income year. The Act commenced on 22 December 1993.

6.59 When a bank subsidiary transfers such a loss to a consolidated group, the loss is taken to be made by the group's head company for the income year in which the transfer occurred. In the absence of further rules, this refreshing of the loss incurrence date would mean the loss no longer qualified as a pre-commencement loss. Also, the head company of the group may not satisfy the conditions for a transferring corporation under the FC(TAL) Act.

6.60 Therefore, the FC(TAL) Act will be amended to ensure that losses that would have been transferable by a subsidiary, will continue to be transferable by a consolidated group of which the subsidiary becomes a member. [Schedule 20, item 1, subsection 20(1A) and item 2, subsection 20(1A)]

Modifications to the Schedules to the FC(TAL) Act

6.61 The guide in section 170-5 of Schedule 1 to the FC(TAL) Act will make it clear that special rules apply to allow a head company of a consolidated group to transfer particular losses that it incurred because of a Subdivision 707-A transfer. This is achieved by way of modifications to the existing rules. [Schedule 20, item 4, subsection 170-5(5)]

6.62 The modifications apply where a head company has incurred a tax or net capital loss because of a transfer under Subdivision 707-A and the real loss-maker is a member of the group at the end of the income year for which it is proposed to transfer the loss. [Schedule 20, item 5, subsection 170-75(1) and item 7, subsection 170-175(1)]

6.63 For a loss to be transferred from a loss company to an income company the conditions in the FC(TAL) Act about transferring and receiving corporations having certain characteristics, must be satisfied. The head company will satisfy the conditions for a transferring corporation if the real loss-maker satisfies those conditions. To achieve this the single entity principle has to be ignored in applying the FC(TAL) Act to that real loss-maker at the end of the notional transfer year. [Schedule 20, item 5, subsection 170-75(3) and item 7, subsection 170-175(3)]

6.64 Further, the head company will be taken to have incurred the loss (apart from Subdivision 707-A) for the income year in which the real loss-maker incurred the loss. This has the effect that, if the real loss-maker incurred the loss for the income year in which the FC(TAL) Act commenced (or an earlier income year) the loss is one that may be transferred. [Schedule 20, item 5, paragraph 170-75(2)(b) and item 7, paragraph 170-175(2)(b)]

6.65 All other sections in the Subdivisions operate as if the head company were a transferring corporation within the meaning of the FC(TAL) Act. This ensures that the other sections in these Subdivisions are applied to the head company in the same way as to any other company that is not a head company of a consolidated group. Where those rules rely on provisions in the ITAA 1997 these provisions, as modified for a head company of a consolidated group if applicable, apply. [Schedule 20, item 5, subsection 170-75(2) and item 7, subsection 170-175(2)]

Modifications to section 26C of the FC(TAL) Act

6.66 The relaxed SBT in section 26C of the FC(TAL) Act for a company that transfers a tax loss is modified so that it may apply where the loss is a Subdivision 707-A loss. Where the modified conditions for transfer in Subdivision 170-A in Schedule 1 to the FC(TAL) Act are satisfied, the relaxed SBT will apply as if the head company were the transferring corporation and made the loss for the income year for which the real loss-maker made that loss. [Schedule 20, item 3, subsections 26C(2) and (3)]

6.67 Because the relaxed SBT only applies if the transferring corporation would otherwise fail the requirements of Subdivision 165-A (or Subdivision 175-A), a provision has been included to ensure that Subdivision 165-A applies appropriately to a Subdivision 707-A loss. That is, the head company should apply the COT as modified by Subdivision 707-B or Subdivision 719-F. [Schedule 20, item 3, paragraph 26C(3)(c)]