Tax Law Improvement Act (No. 1) 1998 (46 of 1998)

2   CGT (new Parts 3-1, 3-3 and 3-5)

4   Consequential amendment of other Acts

Financial Corporations (Transfer of Assets and Liabilities) Act 1993

544   At the end of the Act

Add:

Schedule 2 - Net capital losses and the Income Tax Assessment Act 1997

Effect of transferring a net capital loss

170-110 When a corporation can transfer a net capital loss

(1) A transferring corporation within the meaning of the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 (the loss company) can transfer an amount of its *net capital loss for an income year of the loss company (the capital loss year) to a receiving corporation within the meaning of that Act (the gain company) if the conditions in this Subdivision are met.

(2) The amount transferred can be the whole or part of the *net capital loss.

Note: A PDF cannot transfer a net capital loss, except one for a period before it became a PDF: see section 195-30 of the Income Tax Assessment Act 1997.

(3) However, the *loss company cannot transfer so much of the *net capital loss as the loss company has applied, or can apply, in working out its *net capital gain or *net capital loss for an income year before the one in which the amount is transferred.

170-115 Who can apply transferred loss

(1) If an amount of a *net capital loss is transferred, the gain company can apply the amount in working out its *net capital gain for the income year of the gain company for which the amount is transferred or for a later income year. The income year for which the gain company applies the amount is called the application year.

Note: A company's net capital gain or net capital loss for an income year is usually worked out under section 102-5.

(2) The loss company can no longer apply the transferred amount and is taken not to have made the *net capital loss to the extent of that amount.

170-120 Gain company is taken to have made transferred loss

(1) If an amount of a *net capital loss is transferred, the amount is taken to be a *net capital loss of the gain company for the capital loss year.

(2) However, if the capital loss year is the same as the application year, the amount is taken to be a *capital loss of the gain company for the application year.

170-125 Tax treatment of consideration for transferred tax loss

(1) If the loss company receives consideration from the gain company for the transferred amount:

(a) the consideration is neither assessable income nor exempt income of the loss company; and

(b) the loss company does not make a *capital gain because of receiving the consideration.

Note: However, the consideration may affect how section 170-175 modifies the cost base of direct and indirect interests in the loss company.

(2) If the gain company gives consideration to the loss company for the transferred amount:

(a) the gain company cannot deduct the consideration; and

(b) the gain company does not make a *capital loss because of giving the consideration.

Note: However, the consideration may affect how section 170-175 modifies the cost base of direct and indirect interests in the gain company.

Conditions for transfer

170-128 Financial Corporations (Transfer of Assets and Liabilities) Act 1993 must apply to asset transfer from loss company to gain company

If it were assumed that:

(a) an asset (within the meaning of the Financial Corporations (Transfer of Assets and Liabilities) Act 1993) had been transferred by the loss company to the gain company on the last day of a particular income year of the loss company (the notional transfer year); and

(b) the requirements of paragraphs 7(6)(a) and (b) of that Act were satisfied in relation to that transfer;

then it must be the case that that Act would have applied to that transfer.

170-132 The loss year

The *loss year must be either:

(a) the income year in which the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 commenced; or

(b) an earlier income year.

170-133 The transfer year

(1) The *transfer year must either:

(a) end at the end of the *notional transfer year; or

(b) correspond to the income year of the *loss company that next follows the *notional transfer year.

(2) Also, the *transfer year must be one of the 5 income years after the income year in which the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 commenced.

170-135 The loss company

(1) It must be the case that the loss company was not required to calculate the *net capital loss:

(a) under section 165-114 (because of a change in ownership or control); or

(b) under section 175-75 (because of an injected capital gain or loss).

(2) Also, it must be the case that neither Subdivision 165-CA nor Subdivision 175-CA would have prevented the loss company from applying the *net capital loss in working out its *net capital gain for the application year if it had made enough capital gains in that year.

Note 1: Subdivision 165-CA deals with the consequences of changing ownership or control of a company. Subdivision 175-CA deals with using a company's net capital losses to avoid income tax.

Note 2: A company's net capital gain or net capital loss for an income year is usually worked out under section 102-5.

170-140 The gain company

(1) If the capital loss year and the application year are not the same, the gain company must not be prevented by Subdivision 165-CA or 175-CA from applying the transferred amount in working out its *net capital gain for the application year.

Note 1: Subdivision 165-CA deals with the consequences of changing ownership or control of a company. Subdivision 175-CA deals with using a company's net capital losses to avoid income tax.

Note 2: A company's net capital gain or net capital loss for an income year is usually worked out under section 102-5.

(2) If the capital loss year and the application year are the same, it must be the case that the gain company was not required to calculate its own *net capital gain or *net capital loss for the application year:

(a) under Subdivision 165-CB (because of a change in ownership or control); or

(b) under section 175-75 (because of an injected capital gain or loss).

Note: In deciding whether paragraph (b) applies, remember that the transferred amount is taken to be a capital loss of the gain company for the application year (because of subsection 170-120(2)).

170-145 Maximum amount that can be transferred

Loss company can only transfer what it cannot use itself

(1) The amount transferred cannot exceed the amount of the loss company's *net capital loss that, apart from the transfer, the loss company would carry forward to the next income year after the application year.

Note: If the capital loss year and the application year are the same, the loss company would carry forward the whole of the net capital loss, because section 102-5 does not allow a net capital loss to be applied in the income year in which it was made.

Example: In the application year the loss company has:

a net capital loss from an earlier income year of $25,000; and

other capital losses totalling $10,000; and

capital gains totalling $20,000;

Of the $25,000 loss, the loss company can transfer to the gain company no more than:

$25,000 - ($20,000 - $10,000) = $15,000

Transferred loss must not exceed total cost bases of equity and debt interests in the loss company held by companies in the same wholly-owned group

(2) The amount transferred also cannot exceed the total of the respective *cost bases at the end of the application year (excluding indexation) of:

(a) each *share in the loss company that is held at the end of the application year by a company that:

(i) was a member of the same *wholly-owned group as the loss company throughout the application year (disregarding a period when either was not *in existence); and

(ii) *acquired the share on or after 20 September 1985; and

(b) each debt that the loss company owes at the end of the application year, for money it *borrowed, to a company that:

(i) was a member of the same *wholly-owned group as the loss company throughout the application year (disregarding a period when either was not *in existence); and

(ii) *acquired the debt on or after 20 September 1985.

(3) No amount can be transferred if there is no such share or debt.

(4) Subsections (2) and (3) do not apply if the gain company is a *100% subsidiary of the loss company throughout the application year (disregarding a period when either was not *in existence).