Private ruling: Utilisation of transferred tax losses
Date of advice: 20 December 2017
Published: May 2018
Ruling period: 20XX to 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: To the extent that a portion of transferred net capital losses was incorrectly utilised in an earlier income year under the concession in Section 707-350 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997), can the remaining unutilised portion of transferred net capital losses be utilised under the concession contained in Section 707-325 ITTPA 1997? | A1: No | Q2: Can the choice to access the ‘Value Donor’ Concession contained in Section 707-325 of the ITTPA 1997 be made after the utilisation of a loss that has been transferred into a tax consolidated group subsequent to the formation of that group? | A2: No | Q3: Should the answer to Question 2 be in the affirmative, can the Value Donor Concession be accessed with respect to the unutilised balance of the transferred net capital losses (as outlined in Question 1) if they are utilised in the 20XX year or in a future income year? | A3: Not necessary

Relevant facts and circumstances: In January 20XX, a MEC Group was formed with a provisional head entity. Two other companies also joined the MEC Group upon formation. At the end of December 20XX, the two subsidiary companies had carried forward net capital losses, which had been originally incurred during the 19XX year (Notional Transferred Net Capital Losses). On consolidation, the Notional Transferred Net Capital Losses were transferred into the MEC Group, on the basis that they believed the Continuity of Ownership Test (COT) had been satisfied, subject to the modifications contained in Division 707-A of the Income Tax Assessment Act 1997 (ITAA 1997). For each income year between 20XX and 20XX, the MEC Group disclosed concessional net capital losses in its income tax return. This disclosure was made under Item 10T of Part A of the Consolidated Groups Losses Schedule, which was lodged in conjunction with the income tax return. After 20XX, as disclosure of concessional losses was no longer required, the Notional Transferred Net Capital Losses were disclosed at Part A, Item 10U, as transferred losses. In the 20XX year, an amount of the Notional Transferred Net Capital Losses were utilised by the MEC Group to offset a net capital gain. The utilisation of these losses was disclosed at Part A, Item 8I of the Consolidated Groups Losses Schedule as the utilisation of transferred net capital losses. No available fraction was disclosed in relation to the 20XX Utilised Losses. A recent analysis by the taxpayer identified that the position adopted in relation to the ability to transfer the Notional Transferred Net Capital Losses was incorrect, and these losses were not available to be transferred into the MEC Group as COT Concession losses due to a previous failure of the COT with respect to those net capital losses. The taxpayer believes that the Same Business Test (SBT) should be satisfied for each of the capital losses transferred in on consolidation, meaning that the losses should still have been transferred into the MEC Group upon consolidation. In 20XX another company and its subsidiaries joined the MEC Group. On joining the MEC Group an amount of net capital losses were transferred in under Subdivision 707-A of the ITAA 1997. In the 20XX tax year the MEC Group utilised an amount of the losses transferred into the group in 20XX. The utilisation of these losses was disclosed at Part A, Item 8I of the Consolidated Groups Losses Schedule.

Relevant legislative provisions: Income Tax (Transitional Provisions) Act 1997 section 707-325

Reasons for decision: Summary: As is evident from both the previous tax returns lodged for the taxpayer and from the facts described in the ruling application, the taxpayer has already utilised transferred losses in both the tax returns lodged for the 20XX year and the 20XX year but evidently the choice to use the value donor concession had not been made by the time either of those tax returns was lodged. Whilst there may be some doubt about the legitimate utilisation of any amount of transferred loss in the 20XX year which may call into question whether the choice was still open to be made by the taxpayer in a later tax return, that later time would have expired with lodgement of the tax return for the 20XX year in which a transferred loss was utilised. The reference in paragraph 707-325(5)(a) to ‘…losses transferred to it under Subdivision 707-A of the Income Tax Assessment Act 1997 ’ includes losses transferred to it both at formation and post formation. The tax return for the 20XX year used a loss transferred post formation. Accordingly, the choice to use the value donor concession would have needed to be made by lodgement of the tax return for the 20XX year, or if that return was not a legitimate utilisation of any amount of transferred loss, then by lodgement of the tax return for the 20XX year. As the choice was not made in time, and there being no discretion for the Commissioner to extend the time, the choice cannot now be made. | Detailed Reasoning - Conclusion: The utilisation of the loss transferred into the consolidated group subsequent to the formation of that group would be covered by paragraph 707-325(5)(a) as a loss ‘transferred to it under Subdivision 707-A of the Income Tax Assessment Act 1997 ’ and therefore provides the cut-off date for utilisation of the value donor concession with the effect that, as the concession was not chosen when either the tax return for the 20XX or the 20XX year was lodged, the value donor concession is no longer available.