Consolidation:- limit on utilisation of concessional losses

Is the taxpayer, a head company of a consolidated group, subject to any restrictions on the utilisation of transferred losses after the third income year ending after the losses were transferred, where the utilisation of those losses is affected by section 707-350 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997)?

No. Subsection 707-350(3) of the IT(TP)A 1997 provides that in the third or later income year after the initial transfer time, the head company of a consolidated group can recoup all of the unutilised concessional losses in a bundle. Subject to the recoupment tests being met and sufficient income or gains being available, concessional losses can be utilised without restriction after the third income year, if the head company did not utilise all those losses by that time.

A consolidated group comprising of Company A (head company) and Company B (its wholly-owned subsidiary) forms before 1 July 2004.

A bundle of losses incurred by Company B (the real loss-maker) are transferred to Company A at the date of consolidation.

Some of the transferred losses in this bundle are concessional losses because they satisfy the conditions in subsection 707-350(1) of the IT(TP)A 1997: • they were incurred by the real loss-maker for an income year ending on or before 21 September 1999, • they were transferred before 1 July 2004 at the time the consolidated group formed, • they were transferred because the continuity of ownership test is satisfied and the control test is not breached, • none of those losses were previously transferred, • the real loss-maker had not been, at any time before the initial transfer time, a transitional foreign loss-maker prevented by subsection 701D-10(1) of the IT(TP)A from being a subsidiary member of a consolidated group, and • the head company makes the choice to use the concessional method for utilisation of all the losses in the bundle that meet the conditions in all the dot points above.

A concessional loss in this bundle has not been fully utilised by the end of the third income year ending after the date of consolidation. The head company, Company A, satisfies the recoupment tests for utilisation of this concessional loss in later income years.

Subsection 707-350(3) of the IT(TP)A 1997 provides that in the third or later income year after the initial transfer time, the head company of a consolidated group can recoup all of the unutilised concessional losses in a bundle of losses.

The Explanatory Memorandum to New Business Tax System (Consolidation) Bill (No. 1) 2002 describes the effect of subsection 707-350(3) of the IT(TP)A 1997 at paragraph 9.62: If, after the third income year, the group still has undeducted losses of this sort, then it may use them without restriction (i.e. the limit ceases to apply, though the general loss recoupment tests do apply).

Utilisation of concessional losses for an income year is limited to the maximum amount calculated by the table in subsection 707-350(3) of the IT(TP)A 1997. That subsection effectively requires that the total amount of concessional losses of each sort in a bundle is divided into three equal portions. The head company can only utilise a maximum of one portion (that is, one third) of those losses in the first year. In the second income year the head company can utilise the difference between 2/3 of those losses and the amount of those losses utilised in the first income year.

Any amount of a loss that remains unutilised at the end of the second income year is not subject to any further restriction with respect to the limit in subsequent income years. Item 3 in the table in subsection 707-350(3) of the IT(TP)A 1997 applies to the third income year ending after the initial transfer time, or a later income year. The loss that is available to be utilised is the maximum difference between: • the total amount of the loss; and • the total amount of the loss utilised for earlier income years ending after the initial transfer time.

No further restrictions apply.

In this case, Company A has not fully utilised a concessional loss in the bundle by the end of the third year. Item 3 in the table in subsection 707-350(3) of the IT(TP)A 1997 determines that the maximum amount of losses available for utilisation in the third and subsequent income years, is the amount not yet utilised.