Private ruling: Finance Development Losses
Published: October 2013
Ruling period: 1 July XXXX to 30 June XXXX
Date scheme commenced: 1 July XXXX

Ruling: Q1: Were effective loss donor choices made under subsection 707-327(4) of the Income Tax (Transitional Provisions) Act 1997 ( IT(TP)A ) to treat net capital losses made by particular real loss-makers as if they were included in another real loss-maker's bundle of losses, as evidenced by loss donation working papers prepared and signed by the Public Officer in 200X? | A1: Yes | Q2: Does it follow that effective loss donor choices were made under subsection 707-327(4) of the IT(TP)A to treat net capital losses made by particular real loss-makers, that were discovered to have been transferred to the head company after the statutory time limit in subsection 707-325(5) had expired, as if they were included in another real loss-maker's bundle of losses? | A2: No

Relevant facts and circumstances: The description of the scheme is based on information provided by the applicant. 1 Company A is the head company of a Tax Consolidated Group (TCG) which was formed effective from 1 July 200Y. 2 The TCG Loss Elections Notice was signed by the Public Officer of Company A in 200X. The TCG Loss Elections Notice made reference to an accompanying Schedule that documents each loss donation choice made effective by the TCG Loss Elections Notice. 3 The loss donation working papers evidence choices made in respect of identified unutilised net capital losses that were transferred from members of the TCG to Company A at the time the TCG formed. 4 The loss donation working papers identify each unutilised net capital losses known as at 200X to have been transferred to Company A on 1 July 200Y (the identified losses). 5 The Schedule evidences choices made in respect of the identified losses. 6 Sometime after 200X Company A became aware that additional unutilised net capital losses had been transferred to Company A at the time the TCG formed (the discovered losses).

Relevant legislative provisions: Income Tax Assessment Act 1936 , section 170 | Income Tax Assessment Act 1997 , subsection 102-10(1) | Income Tax Assessment Act 1997 , section 145 | Income Tax Assessment Act 1997 , Division 707 | Income Tax Assessment Act 1997 , subdivision 707-A | Income Tax Assessment Act 1997 , subdivision 707-C | Income Tax Assessment Act 1997 , section 719-50 | Income Tax Assessment Act 1997 , paragraph 719-5(4)(c) | Income Tax Assessment Act 1997 , section 995-1 | Income Tax (Transitional Provisions) Act 1997 , Division 707 | Income Tax (Transitional Provisions) Act 1997 , section 707-325 | Income Tax (Transitional Provisions) Act 1997 , section 707-327 | Income Tax (Transitional Provisions) Act 1997 , subsection 707-327(1) | Income Tax (Transitional Provisions) Act 1997 , paragraph 707-327(1)(a) | Income Tax (Transitional Provisions) Act 1997 , subsection 707-327(2) | Income Tax (Transitional Provisions) Act 199 7, subsection 707-327(3) | Income Tax (Transitional Provisions) Act 1997 , subsection 707-327(4) | Income Tax (Transitional Provisions) Act 1997 , paragraph 707-327(4)(a) | Income Tax (Transitional Provisions) Act 1997 , subsection 707-327(5) Reason for decision | All legislative references are to the Income Tax (Transitional Provisions) Act 1997 unless stated otherwise stated. Question 1 | Summary | Company A made effective loss donor choices under subsection 707-327(4), to treat particular identified losses as if they were included in another real loss-makers bundle of losses. | Detailed reasoning | The choice to utilise a loss as if it was in another real loss-maker's bundle (the 'loss donor choice') is made under subsection 707-327(4). The loss donor choice applies on a loss-by-loss basis, with each loss being referable to a loss that was transferred to the head company of a consolidated group under Subdivision 707-A of the ITAA 1997. | The loss donation working papers evidence the numerous value donor choices and loss donor choices made by Company A. These documents provide the necessary evidence that a number of effective choices were made by Company A in compliance with the transitional value donor and loss donor provisions. | Under paragraph 707-327(5)(a) a loss donor choice must be made by 31 December 2005, where an income tax return has been previously lodged for the first income year that a transferred loss is utilised. The TCG Loss Election Notice was signed by the Public Officer of the Company A in 200X | The Schedule identifies the loss donor choices made by Company A in respect of certain net capital losses that were transferred to Company A on 1 July 200Y. At the time the loss donation working papers were prepared the net capital losses identified in the Schedule were the only net capital losses known to have been transferred to Company A on 1 July 200Y. | The loss donation working papers provide that Company A has made effective choices, in accordance with section 707-327(4), to donate particular net capital losses to the relevant loss bundle identified. | Question 2 | Summary | As the statutory time limit had expired effective loss donor choices were not able to be made in respect of the discovered losses. The loss donation working papers prepared and signed by the Public Officer in 200X do not evidence loss donor choices in respect of those losses later discovered to have been transferred to the head company at the time the TCG formed. | Detailed reasoning | The applicant contended that effective loss donor choices had been made in respect of the discovered losses for broadly the following reasons: | 1. The fact that a loss donor choice is not required by law to be documented in a particular way has implications for how the loss donor provision is to be interpreted. | We agree that section 707-327 does not require a loss donor choice to be made in any particular form or any particular way. The applicant has cited GE Capital Finance Australasia Pty Ltd v Commissioner of Taxation [2011] FCA 849 ( GE Capital ) as support for finding that where 'no particular form of choice was required' all that is required to satisfy the statute is that the taxpayer have 'made' the choice. | 2. That an amount of loss subject to a loss donation choice does not have to identified for an effective choice to be made. | We agree that a failure to record the amount of a loss in the choice documentation would not necessarily invalidate a loss donor choice. The Commissioner has provided, in Taxation Determination TD 2005/50, his view that a change in the quantum of a loss would not be something that would invalidate a loss donor choice. | However, Question 2 does not concern a change in the quantum of a transferred loss. It involves the recognition, subsequent to the loss donation working papers being prepared, of net capital losses that were transferred to Company A when the TCG formed. | This question does not involve the 'adjustment' of choice that had already been made within the statutory time limit for making a loss donor choice. This question is considering whether additional subsection 707-327(4) loss donor choices are able to be made in respect of the discovered losses. | 3. That the head company need not be aware of the existence of a loss for an effective loss donation choice to be made. | The applicant makes reference to TD 2005/50 and makes the inference that it is not necessary that the head company be aware of the loss at the time of making the choice. We disagree with this inference and make reference to Footnote 5 in TD 2005/50 that states: | Section 707-327 does not prescribe how the choice is made. There is no approved form in which to record the choice. However, specifying details such as the sort of loss, the amount, the original loss year and the value donor's loss bundle when documenting the choice will make it explicit which particular loss is the subject of the choice. | Our view is that the loss donor provision does not permit implicit choices to be effective. The provision only allows loss donation choices to be made in respect of losses that are known to exist at the time the choice is made. There is no flexibility in the words of the provision to allow a loss that becomes known after the statutory time limit has expired to become subject to a loss donation choice. The words of the loss donor provision are clear and unambiguous; as such there is no requirement to consider the intention of Company A, as may be inferred by the loss donation working papers, to assist our interpretation. | 4. That the loss donation working papers can be interpreted as evidencing effective choices being made in respect of the discovered losses. | The Schedule which accompanied the TCG Loss Election Notice listed each company which was later discovered to have made a discovered loss. Each discovered loss company is identifiable as being a 100% donor of modified market value to a particular loss bundle and each company satisfies the necessary precondition to the making of a loss donor choice under paragraph 707-327(1)(a). The Schedule does not however identify any amount of net capital losses for these companies as having been transferred to Company A or being donated to a particular loss bundle. | A loss donor choice is only able to be made in respect of an identified loss that was transferred to a head company by a loss donor. The opening words in subsection 707-327(1) set out that a loss donor choice must be made in respect of an identified loss: | This section has effect for the purposes of working out under Subdivision 707-C of the Income Tax Assessment Act 1997 how much of a tax loss, film loss or net capital loss can be utilised if: A net capital loss for an income year is worked out by the method statement in subsection 102-10(1) of the ITAA 1997. The method statement reads as follows: | Working out your net capital loss | Step 1. Add up the *capital losses you made during the income year. Also add up the *capital gains you made. | Step 2. Subtract your *capital gains from your *capital losses. | Step 3. If the Step 2 amount is more than zero, it is your net capital loss for the income year. | A net capital loss can only be made if capital losses made during the income year exceed any capital gains made during that year. That is, a net capital loss can only be identified in respect of an amount greater than nil. | The fact that the discovered losses were not identifiable and entered into the Schedule is evidence that the preparer of the loss donation working papers was not making an explicit loss donation choice in 200X in respect of these losses. In fact, it was impossible for the preparer to make a loss donation choice in respect of a discovered loss as there was no knowledge of the existence of these losses before the statutory time limits for the making of such loss donor choice had expired. | The applicant refers to BHP Petroleum (Timor Sea) Pty Ltd and others v Minister for Resources [1994] FCA 1002 (BHP Petroleum) to support their contentions. According to BHP Petroleum at paragraph 45 | a court will apply the ordinary processes of construction to an instrument where an error is an obvious mistake. | We agree with the applicant; as explained by Beaumont J in BHP Petroleum at paragraph 47: | …that an erroneous description of a person or thing does not vitiate an instrument, if there be sufficient certainty expressed as to the object. | However, as in Wingadee Shire Council v Willis [1910] HCA 35; per Issacs J at 144: | the mistake was evident, and could safely be ignored and corrected by the recipient. | Our view is that BHP Petroleum is of little assistance in deciding this question. This is because there was no error, mistake or oversight made in the preparation of the loss donation working papers. | The discovered losses must be utilised by reference to the available fraction calculated for the value donor's own loss bundle; as affected by any effective value donation choice to donate a percentage of that company's modified market value to another real loss-maker. Company A is unable to make additional loss donation choices in respect of the discovered losses because the statutory time limit for making such a choice has expired.

Reasons for decision: Summary: Company A made effective loss donor choices under subsection 707-327(4), to treat particular identified losses as if they were included in another real loss-makers bundle of losses. | Detailed Reasoning - Detailed reasoning: The choice to utilise a loss as if it was in another real loss-maker's bundle (the 'loss donor choice') is made under subsection 707-327(4). The loss donor choice applies on a loss-by-loss basis, with each loss being referable to a loss that was transferred to the head company of a consolidated group under Subdivision 707-A of the ITAA 1997. The loss donation working papers evidence the numerous value donor choices and loss donor choices made by Company A. These documents provide the necessary evidence that a number of effective choices were made by Company A in compliance with the transitional value donor and loss donor provisions. Under paragraph 707-327(5)(a) a loss donor choice must be made by 31 December 2005, where an income tax return has been previously lodged for the first income year that a transferred loss is utilised. The TCG Loss Election Notice was signed by the Public Officer of the Company A in 200X The Schedule identifies the loss donor choices made by Company A in respect of certain net capital losses that were transferred to Company A on 1 July 200Y. At the time the loss donation working papers were prepared the net capital losses identified in the Schedule were the only net capital losses known to have been transferred to Company A on 1 July 200Y. The loss donation working papers provide that Company A has made effective choices, in accordance with section 707-327(4), to donate particular net capital losses to the relevant loss bundle identified. | Summary: As the statutory time limit had expired effective loss donor choices were not able to be made in respect of the discovered losses. The loss donation working papers prepared and signed by the Public Officer in 200X do not evidence loss donor choices in respect of those losses later discovered to have been transferred to the head company at the time the TCG formed. | Detailed Reasoning - Detailed reasoning: The applicant contended that effective loss donor choices had been made in respect of the discovered losses for broadly the following reasons: 1. The fact that a loss donor choice is not required by law to be documented in a particular way has implications for how the loss donor provision is to be interpreted. We agree that section 707-327 does not require a loss donor choice to be made in any particular form or any particular way. The applicant has cited GE Capital Finance Australasia Pty Ltd v Commissioner of Taxation [2011] FCA 849 ( GE Capital ) as support for finding that where 'no particular form of choice was required' all that is required to satisfy the statute is that the taxpayer have 'made' the choice. 2. That an amount of loss subject to a loss donation choice does not have to identified for an effective choice to be made. We agree that a failure to record the amount of a loss in the choice documentation would not necessarily invalidate a loss donor choice. The Commissioner has provided, in Taxation Determination TD 2005/50, his view that a change in the quantum of a loss would not be something that would invalidate a loss donor choice. However, Question 2 does not concern a change in the quantum of a transferred loss. It involves the recognition, subsequent to the loss donation working papers being prepared, of net capital losses that were transferred to Company A when the TCG formed. This question does not involve the 'adjustment' of choice that had already been made within the statutory time limit for making a loss donor choice. This question is considering whether additional subsection 707-327(4) loss donor choices are able to be made in respect of the discovered losses. 3. That the head company need not be aware of the existence of a loss for an effective loss donation choice to be made. The applicant makes reference to TD 2005/50 and makes the inference that it is not necessary that the head company be aware of the loss at the time of making the choice. We disagree with this inference and make reference to Footnote 5 in TD 2005/50 that states: Section 707-327 does not prescribe how the choice is made. There is no approved form in which to record the choice. However, specifying details such as the sort of loss, the amount, the original loss year and the value donor's loss bundle when documenting the choice will make it explicit which particular loss is the subject of the choice. Our view is that the loss donor provision does not permit implicit choices to be effective. The provision only allows loss donation choices to be made in respect of losses that are known to exist at the time the choice is made. There is no flexibility in the words of the provision to allow a loss that becomes known after the statutory time limit has expired to become subject to a loss donation choice. The words of the loss donor provision are clear and unambiguous; as such there is no requirement to consider the intention of Company A, as may be inferred by the loss donation working papers, to assist our interpretation. 4. That the loss donation working papers can be interpreted as evidencing effective choices being made in respect of the discovered losses. The Schedule which accompanied the TCG Loss Election Notice listed each company which was later discovered to have made a discovered loss. Each discovered loss company is identifiable as being a 100% donor of modified market value to a particular loss bundle and each company satisfies the necessary precondition to the making of a loss donor choice under paragraph 707-327(1)(a). The Schedule does not however identify any amount of net capital losses for these companies as having been transferred to Company A or being donated to a particular loss bundle. A loss donor choice is only able to be made in respect of an identified loss that was transferred to a head company by a loss donor. The opening words in subsection 707-327(1) set out that a loss donor choice must be made in respect of an identified loss: This section has effect for the purposes of working out under Subdivision 707-C of the Income Tax Assessment Act 1997 how much of a tax loss, film loss or net capital loss can be utilised if: A net capital loss for an income year is worked out by the method statement in subsection 102-10(1) of the ITAA 1997. The method statement reads as follows: | Detailed Reasoning - Working out your net capital loss: Step 1. Add up the *capital losses you made during the income year. Also add up the *capital gains you made. Step 2. Subtract your *capital gains from your *capital losses. Step 3. If the Step 2 amount is more than zero, it is your net capital loss for the income year. A net capital loss can only be made if capital losses made during the income year exceed any capital gains made during that year. That is, a net capital loss can only be identified in respect of an amount greater than nil. The fact that the discovered losses were not identifiable and entered into the Schedule is evidence that the preparer of the loss donation working papers was not making an explicit loss donation choice in 200X in respect of these losses. In fact, it was impossible for the preparer to make a loss donation choice in respect of a discovered loss as there was no knowledge of the existence of these losses before the statutory time limits for the making of such loss donor choice had expired. The applicant refers to BHP Petroleum (Timor Sea) Pty Ltd and others v Minister for Resources [1994] FCA 1002 (BHP Petroleum) to support their contentions. According to BHP Petroleum at paragraph 45 a court will apply the ordinary processes of construction to an instrument where an error is an obvious mistake. We agree with the applicant; as explained by Beaumont J in BHP Petroleum at paragraph 47: …that an erroneous description of a person or thing does not vitiate an instrument, if there be sufficient certainty expressed as to the object. However, as in Wingadee Shire Council v Willis [1910] HCA 35; per Issacs J at 144: the mistake was evident, and could safely be ignored and corrected by the recipient. Our view is that BHP Petroleum is of little assistance in deciding this question. This is because there was no error, mistake or oversight made in the preparation of the loss donation working papers. The discovered losses must be utilised by reference to the available fraction calculated for the value donor's own loss bundle; as affected by any effective value donation choice to donate a percentage of that company's modified market value to another real loss-maker. Company A is unable to make additional loss donation choices in respect of the discovered losses because the statutory time limit for making such a choice has expired.