TAXATION LAWS AMENDMENT ACT (NO. 5) 2003 NO. 142, 2003 - SCHEDULE 8

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TAXATION LAWS AMENDMENT ACT (NO. 5) 2003 NO. 142, 2003 - SCHEDULE 8

- Tax losses

Income Tax Assessment Act 1936

1 Section 245-110 in Schedule 2C (item 1 in column 2 of the table in the definition of table of deductible revenue losses )

After "36-15", insert "or 36-17".

2 Section 57-75 in Schedule 2D

After "36-15", insert "or 36-17".

3 Subsection 268-60(5) in Schedule 2F (note)

After "36-15", insert "or 36-17".

Income Tax Assessment Act 1997

4 At the end of subsection 4-10(3A)

Add:

Note 3: Amounts of tax offsets to which a corporate tax entity is entitled under Division 207 and Subdivision 210-H may in some circumstances be converted into an amount of a tax loss for the entity. See Subdivision 36-C.

5 Section 36-10 (note)

Omit "Note", substitute "Note 1".

6 At the end of section 36-10

Add:

Note 2: The meanings of tax loss and loss year are modified by section 36-55 for a corporate tax entity that has an amount of excess franking offsets.

7 Section 36-15 (heading)

Repeal the heading, substitute:

36-15 How to deduct tax losses of entities other than corporate tax entities 8 Subsection 36-15(1)

Repeal the subsection, substitute:

(1): Your ^*tax loss for a ^*loss year is deducted in a later income year as follows if you are not a ^*corporate tax entity at any time during the later income year.

Note: See section 36-17 for the deduction of a tax loss of an entity that is a corporate tax entity at any time during the later income year.

9 After section 36-15

Insert:

36-17 How to deduct tax losses of corporate tax entities

(1): A ^*tax loss of an entity for a ^*loss year is deducted in a later income year as follows if the entity is a ^*corporate tax entity at any time during the later income year.

If the entity has no net exempt income

(2): If the entity's total assessable income for the later income year exceeds the entity's total deductions (except ^*tax losses), the entity is to deduct from that excess so much of the tax loss as the entity chooses. The entity may choose a nil amount.

If the entity has net exempt income

(3): If the entity has ^*net exempt income for the later income year and the entity's total assessable income (if any) for that year exceeds the entity's total deductions (except ^*tax losses), the entity is to:

(a) first, deduct the tax loss from the net exempt income; and
(b) secondly, deduct from the part of the total assessable income that exceeds those deductions so much of the undeducted amount of the tax loss (if any) as the entity chooses.

The entity may choose a nil amount under paragraph (b).

Note: To work out the corporate tax entity's net exempt income: see section 36-20.

(4): However, if the entity has ^*net exempt income for the later income year and those deductions exceed the entity's total assessable income, the entity is to:

(a) subtract that excess from the net exempt income; and
(b) deduct the ^*tax loss from any net exempt income that remains.

Note: This means there is no choice available under this subsection.

Limit to how much the entity can choose

(5): The choice that the entity has under subsection (2) or (3) for the later income year is subject to both of the following:

(a) the entity must choose a nil amount if, disregarding the ^*tax loss and other tax losses of the entity, the entity would have an amount of ^*excess franking offsets for that year;
(b) if, disregarding the tax loss and other tax losses of the entity, the entity would not have an amount of excess franking offsets for that year—the entity must not choose an amount that would result in the entity having an amount of excess franking offsets for that year.

Example: For the 2002-2003 income year, Company A has:

* a tax loss of $150 from a previous income year; and
* assessable income of $200 (franked distribution of $70, franking credit of $30 and $100 of income from other sources); and
* no allowable deductions; and
* no net exempt income.

The tax offset of $30 from the franking credit is not subject to the refundable tax offset rules in Division 67.

Company A would not have an amount of excess franking offsets for that year if the tax loss were disregarded (see section 36-55). This is because the tax offset of $30 is less than $60, the amount of income tax that Company A would have to pay if it did not have the tax offset and the tax loss. Paragraph (a) therefore does not apply.

If Company A chooses to deduct the full amount of the tax loss, it would have an amount of excess franking offsets of $15:

Company A therefore cannot make this choice because of paragraph (b).

However, if Company A chooses to deduct $100 of the tax loss, it would not have an amount of excess franking offsets:

Company A therefore can choose to deduct $100 of the tax loss.

(6): The entity must state its choice under subsection (2) or (3) in its ^*income tax return for the later income year.

General

(7): If the entity has 2 or more ^*tax losses, the entity is to deduct them in the order in which the entity incurred them.
(8): A ^*tax loss can be deducted under this section only to the extent that it has not already been deducted.
(9): If, under this section, a ^*corporate tax entity does not or cannot deduct all or part of a ^*tax loss in an income year, the entity can carry forward the undeducted amount to the next income year. This Subdivision then applies in working out how it can deduct the tax loss in that income year.

Note: The entity's tax losses may be reduced if any of its commercial debts have been forgiven in the income year: see Subdivision 245-E of Schedule 2C to the Income Tax Assessment Act 1936 .

Recalculation of amounts resulting in a choice or a change of a choice

(10): Subsection (11) or (12) applies if at least one of the following amounts is recalculated after an entity has lodged its ^*income tax return for an income year:

(a) the amount of a ^*tax loss that the entity can deduct in that year;
(b) the amount of the difference between the entity's total assessable income for that year and the entity's total deductions (other than ^*tax losses) for that year;
(c) the amount of the entity's ^*net exempt income for that year;

whether or not the amount is recalculated in an amendment of the entity's assessment for that year, and whether or not the amount was a nil amount before the recalculation (or has become a nil amount after the recalculation).

(11): If:

(a) before the recalculation, a choice under subsection (2) or (3) for the income year was not available to the entity; but
(b) as a result of the recalculation, the choice has (apart from subsection (6)) become available to the entity;

the entity can make that choice by written notice given to the Commissioner.

(12): If:

(a) the entity made a choice under subsection (2) or (3) for the income year; but
(b) as a result of the recalculation, the entity wishes to change that choice;

the entity can do so by written notice given to the Commissioner.

(13): Subsections (10) to (12) have effect subject to section 170 of the Income Tax Assessment Act 1936 (about amendment of assessments).

10 Section 36-25 (after the table headed " Tax losses of companies ")

Insert:

Tax losses of corporate tax entities

Item	For the special rules about this situation...	See:
1.	A ^corporate tax entity that has an amount of ^excess franking offsets for an income year: it works out its ^*tax loss in a special way.	Subdivision 36-C

11 At the end of Division 36

Add (before the link note):

Subdivision 36-C—Excess franking offsets

Guide to Subdivision 36-C 36-50 What this Subdivision is about

Amounts of tax offsets to which a corporate tax entity is entitled under Division 207 and Subdivision 210-H may in some circumstances be converted into an amount of a tax loss for the entity.

Table of sections

Operative provision

36-55 Converting excess franking offsets into tax loss

[This is the end of the Guide.]

Operative provision 36-55 Converting excess franking offsets into tax loss

Excess franking offsets

(1): An entity that is a ^*corporate tax entity at any time during an income year has an amount of excess franking offsets for that year if:

(a) the total amount of ^*tax offsets to which the entity is entitled for that year under Division 207 and Subdivision 210-H (except those that are subject to the refundable tax offset rules because of section 67-25);

exceeds:

(b) the amount of income tax that the entity would have to pay on its taxable income for that year if:
(i) it did not have those tax offsets; and
(ii) it did not have any tax offsets that are subject to the tax offset carry forward rules or the refundable tax offset rules;
but had all its other tax offsets.

The excess is the amount of excess franking offsets .

Note: Division 65 sets out the tax offset carry forward rules. Division 67 sets out the refundable tax offset rules.

Example: For the 2002-2003 income year, Company E has:

* assessable income of $200 (franked distribution of $140 and franking credit of $60); and
* $100 of deductions that are allowable.

The tax offset of $60 from the franking credit is not subject to the refundable tax offset rules in Division 67.

Disregarding the tax offset of $60 from the franking credit, the amount of income tax that Company E would have to pay is $30:

This amount is $30 less than the tax offset of $60. Company E therefore has an amount of excess franking offsets of $30 for that year.

How to work out the amount of the tax loss

(2): For the purposes of this Act, if:

(a) an entity has an amount of ^*excess franking offsets for an income year; and
(b) the result of applying the following method statement is a positive amount;

then:

(c) the entity is taken to have a ^*tax loss for that year equal to that positive amount (instead of an amount of tax loss worked out under section 36-10, 165-70, 175-35 or 701-30); and
(d) that year is taken to be a ^*loss year for the entity if the entity would not otherwise have a tax loss for that year.

Method statement

Step 1. Work out the amount (if any) that would have been the entity's ^*tax loss for that year under section 36-10, 165-70, 175-35 or 701-30 if the entity's ^*net exempt income for that year (if any) were disregarded.

Note: See section 36-20 for the calculation of net exempt income.

Step 2. Divide the amount of ^*excess franking offsets by the ^*corporate tax rate.
Step 3. Add the results of steps 1 and 2.
Step 4. Reduce the result of step 3 by the entity's ^*net exempt income for that year (if any).
The result of this step is taken to be the entity's ^*tax loss for that year. However, if the result of this step is nil or a negative amount, the company does not have any tax loss for that year.

Example: Assume that company E did not derive any exempt income for the 2002-2003 income year and that it would not otherwise have any tax loss for that year under section 36-10, 165-70, 175-35 or 701-30.

Applying the method statement, the amount of excess franking offsets of $30 generates a tax loss of $100 for that year, which can be deducted in a later income year under section 36-15 or 36-17.

12 Subsection 165-70(5) (note)

Omit "36-15", substitute "36-17".

13 At the end of section 165-70 (before the notes)

Add:

Note: The meanings of tax loss and loss year are modified by section 36-55 for a corporate tax entity that has an amount of excess franking offsets.

14 Subsection 170-20(1)

Omit "36-15", substitute "36-17".

15 Subsection 170-45(1)

Repeal the subsection, substitute:

Loss company can only transfer what it cannot use itself

(1): The amount transferred cannot exceed the amount of the ^*loss company's ^*tax loss that, apart from the transfer, the loss company would carry forward to the next income year after deducting in the ^*deduction year the maximum amount of tax losses that the loss company can deduct under section 36-17.

16 Subsection 175-35(5) (note)

Omit "36-15", substitute "36-17".

17 At the end of section 175-35 (before the notes)

Add:

Note: The meanings of tax loss and loss year are modified by section 36-55 for a corporate tax entity that has an amount of excess franking offsets.

17A Subsection 707-310(3) (table item 6, paragraph (c) of
column 2)

Repeal the paragraph, substitute:

reduced by the amount (the transferee's grossed-up franking offset amount ) worked out in accordance with paragraph (3A)(c)

17B After subsection 707-310(3)

Insert:

(3A): For the purposes of subsection (3):

(a) the transferee's ^*tax losses to which paragraph (b) of, or the table in, that subsection applies are to be worked out on the assumption that the transferee chooses to deduct under subsection 36-17(2) all of the tax losses and that subsection 36-17(5) does not apply to that choice; and
(b) except as mentioned in paragraph (a) of this subsection, amounts worked out as described in column 2 of an item of the table in subsection (3) are to be worked out making the same choices as the transferee actually makes in working out its taxable income as stated in its ^*income tax return for the income year; and
(c) the transferee's grossed-up franking offset amount mentioned in column 2 of item 6 in the table is the amount worked out using the formula:

where:
franking offsets means the total amount of ^*tax offsets to which the transferee is entitled for the income year under Division 207 and Subdivision 210-H (except those that are subject to the refundable tax offset rules because of section 67-25).

18 Subsection 995-1(1)

Insert:

"excess franking offsets "has the meaning given by section 36-55.

19 Subsection 995-1(1) (at the end of the definition of loss
year )

Add:

Note: The meaning of loss year in sections 36-10, 165-70 and 175-35 is modified by section 36-55 for a corporate tax entity that has an amount of excess franking offsets.

20 Subsection 995-1(1) (the note at the end of paragraph (a) of the definition of tax loss )

Omit "Note", substitute "Note 1".

21 Subsection 995-1(1) (before paragraph (b) of the definition of tax loss )

Insert:

Note 2: The meaning of tax loss in sections 36-10, 165-70, 175-35 and 701-30 is modified by section 36-55 for a corporate tax entity that has an amount of excess franking offsets.

Taxation Administration Act 1953

22 Subsections 45-330(2A) and (3) in Schedule 1

Repeal the subsections, substitute:

Special rule for some entities

(2A): If an entity:

(a) has ^*tax losses transferred to it under Subdivision 707-A of the Income Tax Assessment Act 1997 ; or
(b) is a ^*corporate tax entity at any time during the ^*base year;

the adjusted taxable income of the entity for the base year is worked out under subsection (1) as if paragraph (1)(c) were replaced by the following provision:

(c) the lesser of the following amounts:
(i) the amount of any tax loss, to the extent that you can carry it forward to the next income year;
(ii) the amount of the deductions for tax losses used in making your ^*base assessment.

Special rule for life insurance companies

(3): The adjusted taxable income of a ^*life insurance company for the ^*base year is worked out as follows:

Method statement

Step 1 . Recalculate the ^*ordinary class of the taxable income for the ^*base assessment on the basis that the assessable income that relates to the class did not include any ^*net capital gain.
Step 2 . Add to the step 1 result the ^*complying superannuation class of the taxable income for the ^*base assessment.
Step 3 . Add to the step 2 result the deductions for ^*tax losses used in making the ^*base assessment.
Step 4 . Reduce the step 3 result by the lesser of the following amounts:

(a) the amount of any tax loss, to the extent that the ^*life insurance company can carry it forward to the next income year;
(b) deductions for ^*tax losses used in making the ^*base assessment.

23 Subsections 45-330(4) and (5) in Schedule 1

Repeal the subsections.

24 Application of amendments

(1) The amendments made by items 1, 2 and 3 apply in relation to the deduction of a tax loss in the year of income including 1 July 2002 and each later year of income.
(2) The amendments made by items 7, 8, 9, 12, 14, 15 and 16 apply in relation to the deduction of a tax loss in the income year including 1 July 2002 and each later income year.
(3) The amendments made by items 4, 5, 6, 10, 11, 13, 17, 17A, 17B, 18, 19, 20 and 21 apply to the income year including 1 July 2002 and each later income year.
(4) The amendments made by items 22 and 23 apply to a base year that is an income year including 1 July 2002 or is a later income year.

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