ATO ID 2005/59: Consolidation: value and loss donor rules - a loss can only be taken into account for the value donor rule or loss donor rule but not both
Date of decision: 10 February 2005
Year of income: Year ended 30 June 2004
Business line: Consolidation Centre of Expertise

Issue
Can a choice be made by the transferee, under subsection 707-327(4) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A), to 'donate' a loss where:

Decision
No. Subsection 707-327(6) of the IT(TP)A prevents the transferee from making a choice, under subsection 707-327(4) of the IT(TP)A, to treat the loss as if it was included in another bundle of losses.

Facts
Head Co forms a consolidated group before 1 July 2004. The members of the consolidated group at the time the group forms are Head Co, Donor Co and Sub Co. Head Co and Donor Co were members of the same wholly-owned group prior to 1 July 2000 and Sub Co became a member of the wholly-owned group during the 2000-01 income year. At the time the group forms, tax losses are transferred, under Subdivision 707-A of the ITAA 1997, from Head Co and Sub Co to Head Co, as the head company of the consolidated group. The respective income years for which each of these tax losses were originally incurred are shown in the diagram. All of the conditions in section 707-325 of the IT(TP)A are satisfied for Donor Co to be a value donor in respect of Head Co and for Head Co to be a value donor in respect of Sub Co. In working out the available fractions for 'Bundle Head Co' and 'Bundle Sub Co', the following 'donations' of value are made: Both of the losses in 'Bundle Head Co' are included in the 'total of real loss-maker's Division 170 of the ITAA 1997 losses in bundle' (as defined in subsection 707-325(4) of the IT(TP)A) in the application of section 707-325 of the IT(TP)A in respect of Donor Co. Head Co seeks to choose, under subsection 707-327(4) of the IT(TP)A, to treat the tax loss originally incurred by Head Co for the 2001-02 income year as if it is included in Bundle Sub Co for the purposes of utilising that loss.

Reasons for decision
Summary: Subsection 707-327(4) of the IT(TP)A states: If the transferee mentioned in subsection 707-325(1) chooses, sections 707-310, 707-335 (except paragraph 707-335(2)(a)) and 707-340 of the Income Tax Assessment Act 1997 (and subsections 707-315(3) and (4) of that Act, so far as they relate to those sections) operate as if, at the initial transfer time: (a) the bundle of losses included the loss; and (b) the loss was not included in any other bundle of losses. Effectively, the result of the choice under 707-327(4) of the IT(TP)A is that a loss that is in one bundle (the value donor bundle) can be treated as if it is included in another bundle of losses (the real loss-maker bundle) for the purposes of utilising that loss. Head Co is a value donor to Sub Co and, if all of the conditions outlined in section 707-327 of the IT(TP)A are met, a loss in Bundle Head Co could be chosen to be treated as if it was included in Bundle Sub Co, for the purposes of utilising that loss. However, subsection 707-327(6) of the IT(TP)A states: Subsection (4) does not apply in relation to the loss if it was covered by paragraphs 707-325(1)(d) and (e) and subsection 707-325(2) in an application of section 707-325 separate from the application of that section mentioned in paragraph (1)(a) of this section. Note: This means that a loss that provided a basis for section 707-325 to apply in relation to the working out of the available fraction for a bundle of losses cannot be treated under this section as if it were included in another bundle of losses. Effectively, subsection 707-327(6) of the IT(TP)A prevents a choice being made under subsection 707-327(4) of the IT(TP)A to donate a loss from the value donor bundle if, in a separate application of section 707-325 of the IT(TP)A: Head Co is a real loss-maker in relation to the donation of modified market value from Donor Co. Therefore, the effect of subsection 707-327(6) of the IT(TP)A is that neither of the losses in Bundle Head Co could be donated to another bundle of losses. In other words, because both of the losses in Bundle Head Co are Division 170 losses in respect of Donor Co, those losses cannot be donated to another bundle of losses. Head Co, as the transferee, cannot make a choice, under subsection 707-327(4) of the IT(TP)A, to treat the tax loss (that was originally incurred by Head Co for the 2001-02 income year) in Bundle Head Co as if it was included in Bundle Sub Co because subsection 707-327(6) of the IT(TP)A prevents this choice being made in respect of this loss.

Legislative references: Income Tax Assessment Act 1997 Division 170 Subdivision 707-A
Subject references: Available fraction Bundle of losses Consolidation - joining Consolidation - losses Joining entity Joining time Modified market value Transfer of losses Value donor Wholly owned