ATO ID 2003/971: Consolidation: losses - transferee's adjusted market value
Date of decision: 1 October 2003
Year of income: 30 June 2004
Business line: Consolidation Centre of Expertise

Issue
Is the market value attributable to losses transferred to the transferee at the initial transfer time, ignored in determining the transferee's adjusted market value at that time for the purposes of subsection 707-320(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. Any market value attributable to losses transferred to the transferee at the initial transfer time, is ignored in determining the transferee's adjusted market value at that time for the purposes of subsection 707-320(1) of the ITAA 1997. This is because losses do not contribute to the group's earning capacity.

Facts
Company A, and its wholly owned subsidiary, Company B form a consolidated group on 1 July 2003. Company B has unused losses from a prior income year. A bundle of losses is formed when losses are transferred (note 1) from Company B to Company A, the head company of the consolidated group at the joining time.

Reasons for decision
Summary: The head company of a consolidated group (the transferee) is required to calculate the available fraction for this bundle of losses where at least one of the losses in the bundle is not a concessional loss. The available fraction for a bundle of losses is calculated in accordance with the formula in subsection 707-320(1) of the ITAA 1997. The denominator in that formula requires the ascertainment of the adjusted market value of the head company (note 2) at the initial transfer time. The adjusted market value of the transferee at the initial transfer time is its market value as at that time, subject to certain assumptions stated in subsection 707-320(1) of the ITAA 1997. One of these assumptions is that 'the transferee did not have a loss of any sort for an income year ending before that time'. Under section 707-115 of the ITAA 1997, only losses that have been made for an income year ending before the joining time may be transferred to the head company of a consolidated group (note 3). It follows that any loss transferred to the head company at the initial transfer time must be for an income year ending before that time. This is the case notwithstanding the fact that, under subsection 707-140(1) of the ITAA 1997, the Act is to operate as if the head company had made the loss for the income year in which the transfer occurs. Subsection 707-140(1) of the ITAA 1997 applies for the purposes of income years ending after the joining time. It enables the head company to use the transferred loss (subject to limitations) in working out its taxable income. However, that subsection does not seek to undo the fact that the loss was actually incurred in an earlier income year - an income year which ended before the initial transfer time. Consequently, under subsection 707-320(1) of the ITAA 1997, for the purposes of determining the head company's adjusted market value at the initial transfer time, it must be valued as if it had no such losses. This interpretation is consistent with the explanation contained in paragraph 8.81 of the Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002, which states: The adjusted market value of the head company to which the losses are initially transferred (i.e. the transferee) is the head company's market value at the transfer time, ignoring any losses it has and assuming that its franking account balance is nil. The value of these attributes is ignored because they did not contribute to the group's earning capacity. Accordingly, under the formula, Company A's adjusted market value at the initial transfer time must be worked out as if Company A did not have any losses for prior income years, even though Company B has transferred such losses to it. Note 1: Subject to the transfer tests contained in Subdivision 707-A of the ITAA 1997. Note 2: Under the single entity principle the value of the head company includes the value of subsidiaries including the loss entity. Note 3: Under subsection 701-30(8) of the ITAA 1997, a non-membership period loss is treated as a loss for an income year ending at the end of the non-membership period.

Legislative references: Income Tax Assessment Act 1997 subsection 701-30(8) section 707-115 subsection 707-140(1) subsection 707-320(1) Subdivision 707-A
Other references: Explanatory Memorandum to the New Business Tax System (Consolidation) Bill (No. 1) 2002
Subject references: Adjusted market value of the consolidated group Available fraction Bundle of losses Consolidation Consolidation - joining Consolidation - losses Transferred losses Utilise a loss