Access to losses in SAP transitional year

Will a taxpayer be entitled to claim a deduction pursuant to Division 36 of the Income Tax Assessment Act 1997 ( ITAA 1997 ) in future years of income for tax losses incurred by it during the three month income year where the special rules in section 36-25 of the ITAA 1997 are satisfied?

Yes. A taxpayer will be entitled to claim a deduction pursuant to Division 36 of the ITAA 1997 in future years of income for tax losses incurred by it during the three month income year where the special rules in section 36-25 of the ITAA 1997 are satisfied?

A taxpayer applied for and received approval from the Commissioner to adopt a SAP. The taxpayer agreed to calculate their taxable income or losses for the relevant SAP income year on the basis of the period that is determined to be the SAP transitional year.

A taxpayer's transitional income tax return is a one-off return that may cover a period either less than or greater than 12 months depending on whether an early balance or late balance SAP is granted. The transitional return commences immediately after the close of the prior income year (the 'old' balance date) and ends on the new SAP balance date. The first full year income tax return will be in lieu of the income year commencing on 1 July and ending on 30 June.

Companies, in order to be members of the same wholly owned group, as that term is defined in section 975-500 of the ITAA 1997, for the whole of the years of income covered by this arrangement, must be members for the whole of the period of the SAP transitional year.

The Commissioner has long standing practices relating to the deductibility of losses carried forward into the transitional return, calculation of losses in the transitional return period, the transfer of losses within the transitional return period and the carrying forward of losses from the transitional period to future years of income. See for example Taxation Ruling IT 2465.

The decision in Norwich Superannuation Services v FC of T (1998) 99 ATC 2015; 41 ATR 1091 is considered to be correct on its facts in that the losses were unable to be transferred as the loss company was not a group company for the whole of the period as required by section 80G of the Income Tax Assessment Act 1936 (ITAA 1936). The Commissioner's view of the operation of section 80G of the ITAA 1936 is set out at paragraph 12 of IT 2465. Division 170 of the ITAA 1997 applies to the transfer of losses that take place in the 1997-98 and later years of income, and paragraph 12 of IT 2465 applies equally to Division 170 of the ITAA 1997. Provided the applicants are members of the same wholly owned group as described at paragraph 12 of IT 2465, they will be able to transfer their losses under Division 170 of the ITAA 1997.

The practice of preparing transitional tax returns covering a period other than 12 months simply allows for the quantum of the taxable income or loss to be fairly and equitably determined for the purpose of levying income tax for the first SAP year. The transitional tax return is not regarded as altering (extending or reducing) the actual 12 month period of the first SAP year for all purposes of the ITAA 1936 or the ITAA 1997.

Any losses incurred in a transitional period will be available for recoupment by transfer or carry forward subject to full compliance with the usual requirements of the continuity of ownership or same business tests and of the group company rules as the case may be. Such tests are to be satisfied for the full income years concerned and not just the transition period.