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Income Tax Assessment Act 1997

Authoritative Version
  • - C2016C00680
  • In force - Superseded Version
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Act No. 38 of 1997 as amended, taking into account amendments up to Tax Laws Amendment (Tax Incentives for Innovation) Act 2016
An Act about income tax and related matters
Administered by: Treasury
General Comments: This compilation is affected by a retrospective amendment. Please see the Tax and Superannuation Laws Amendment (2016 Measures No. 2) Act 2017 (Act No. 15, 2017) for details.
Registered 30 Jun 2016
Start Date 30 Jun 2016
End Date 30 Jun 2016

Income Tax Assessment Act 1997

No. 38, 1997

Compilation No. 157

Compilation date:                              30 June 2016

Includes amendments up to:            Act No. 54, 2016

Registered:                                         30 June 2016

This compilation is in 11 volumes

Volume 1:       sections 1‑1 to 36‑55

Volume 2:       sections 40‑1 to 55‑10

Volume 3:       sections 58‑1 to 122‑205

Volume 4:       sections 124‑1 to 152‑430

Volume 5:       sections 164‑1 to 220‑800

Volume 6:       sections 230‑1 to 312‑15

Volume 7:       sections 315‑1 to 420‑70

Volume 8:       sections 615‑1 to 727‑910

Volume 9:       sections 768‑1 to 995‑1

Volume 10:     Endnotes 1 to 3

Volume 11:     Endnote 4

Each volume has its own contents

 

This compilation includes a commenced amendment made by Act No. 118, 2009

About this compilation

This compilation

This is a compilation of the Income Tax Assessment Act 1997 that shows the text of the law as amended and in force on 30 June 2016 (the compilation date).

The notes at the end of this compilation (the endnotes) include information about amending laws and the amendment history of provisions of the compiled law.

Uncommenced amendments

The effect of uncommenced amendments is not shown in the text of the compiled law. Any uncommenced amendments affecting the law are accessible on the Legislation Register (www.legislation.gov.au). The details of amendments made up to, but not commenced at, the compilation date are underlined in the endnotes. For more information on any uncommenced amendments, see the series page on the Legislation Register for the compiled law.

Application, saving and transitional provisions for provisions and amendments

If the operation of a provision or amendment of the compiled law is affected by an application, saving or transitional provision that is not included in this compilation, details are included in the endnotes.

Editorial changes

For more information about any editorial changes made in this compilation, see the endnotes.

Modifications

If the compiled law is modified by another law, the compiled law operates as modified but the modification does not amend the text of the law. Accordingly, this compilation does not show the text of the compiled law as modified. For more information on any modifications, see the series page on the Legislation Register for the compiled law.

Self‑repealing provisions

If a provision of the compiled law has been repealed in accordance with a provision of the law, details are included in the endnotes.

  

  

  


Contents

Chapter 3—Specialist liability rules                                                           1

Part 3‑5—Corporate taxpayers and corporate distributions                      1

Division 164—Non‑share capital accounts for companies                       1

Guide to Division 164                                                                                                1

164‑1..................... What this Division is about................................................. 1

Operative provisions                                                                                                 2

164‑5..................... Object................................................................................. 2

164‑10................... Non‑share capital account................................................... 2

164‑15................... Credits to non‑share capital account.................................... 3

164‑20................... Debits to non‑share capital account..................................... 5

Division 165—Income tax consequences of changing ownership or control of a company        7

Guide to Division 165                                                                                                7

165‑1..................... What this Division is about................................................. 7

Subdivision 165‑A—Deducting tax losses of earlier income years               8

Guide to Subdivision 165‑A                                                                                     8

165‑5..................... What this Subdivision is about........................................... 8

Operative provisions                                                                                                 9

165‑10................... To deduct a tax loss............................................................ 9

165‑12................... Company must maintain the same owners.......................... 9

165‑13................... Alternatively, the company must satisfy the same business test               11

165‑15................... The same people must control the voting power, or the company must satisfy the same business test    12

165‑20................... When company can deduct part of a tax loss.................... 13

Subdivision 165‑B—Working out the taxable income and tax loss for the income year of the change   14

Guide to Subdivision 165‑B                                                                                   14

165‑23................... What this Subdivision is about......................................... 14

165‑25................... Summary of this Subdivision........................................... 15

165‑30................... Flow chart showing the application of this Subdivision... 17

When a company must work out its taxable income and tax loss under this Subdivision            18

165‑35................... On a change of ownership, unless the company satisfies the same business test     18

165‑37................... Who has more than a 50% stake in the company during a period           18

165‑40................... On a change of control of the voting power in the company, unless the company satisfies the same business test.................................................................................... 20

Working out the company’s taxable income                                                     21

165‑45................... First, divide the income year into periods......................... 21

165‑50................... Next, calculate the notional loss or notional taxable income for each period            22

165‑55................... How to attribute deductions to periods............................. 22

165‑60................... How to attribute assessable income to periods.................. 24

165‑65................... How to calculate the company’s taxable income for the income year       25

Working out the company’s tax loss                                                                    26

165‑70................... How to calculate the company’s tax loss for the income year  26

Special rules that apply if the company is in partnership                              27

165‑75................... How to calculate the company’s notional loss or notional taxable income for a period when the company was a partner............................................................................... 27

165‑80................... How to calculate the company’s share of a partnership’s notional loss or notional net income for a period if both entities have the same income year............................ 28

165‑85................... How to calculate the company’s share of a partnership’s notional loss or notional net income for a period if the entities have different income years.................................. 29

165‑90................... Company’s full year deductions include a share of partnership’s full year deductions            30

Subdivision 165‑CA—Applying net capital losses of earlier income years 31

Guide to Subdivision 165‑CA                                                                                31

165‑93................... What this Subdivision is about......................................... 31

Operative provisions                                                                                               31

165‑96................... When a company cannot apply a net capital loss............... 31

Subdivision 165‑CB—Working out the net capital gain and the net capital loss for the income year of the change                                                                                                         32

Guide to Subdivision 165‑CB                                                                                32

165‑99................... What this Subdivision is about......................................... 32

When a company must work out its net capital gain and net capital loss under this Subdivision              33

165‑102................. On a change of ownership, or of control of voting power, unless the company satisfies the same business test.......................................................................................... 33

Working out the company’s net capital gain and net capital loss                33

165‑105................. First, divide the income year into periods......................... 33

165‑108................. Next, calculate the notional net capital gain or notional net capital loss for each period            33

165‑111................. How to work out the company’s net capital gain.............. 34

165‑114................. How to work out the company’s net capital loss.............. 35

Subdivision 165‑CC—Change of ownership or control of company that has an unrealised net loss        36

Guide to Subdivision 165‑CC                                                                                36

165‑115................. What this Subdivision is about......................................... 36

165‑115AA........... Special rules to save compliance costs.............................. 36

Operative provisions                                                                                               37

165‑115A.............. Application of Subdivision............................................... 37

165‑115B.............. What happens when the company makes a capital loss or becomes entitled to a deduction in respect of a CGT asset after a changeover time............................................. 40

165‑115BA........... What happens when a CGT event happens after a changeover time to a CGT asset of the company that is trading stock..................................................................... 42

165‑115BB............ Order of application of assets: residual unrealised net loss 43

165‑115C.............. Changeover time—change in ownership of company....... 45

165‑115D.............. Changeover time—change in control of company............ 46

165‑115E............... What is an unrealised net loss........................................... 47

165‑115F............... Notional gains and losses................................................. 50

Subdivision 165‑CD—Reductions after alterations in ownership or control of loss company   52

Guide to Subdivision 165‑CD                                                                                52

165‑115GA........... What this Subdivision is about......................................... 52

165‑115GB........... When adjustments must be made...................................... 52

165‑115GC........... How adjustments are calculated........................................ 53

165‑115H.............. How this Subdivision applies........................................... 54

Operative provisions                                                                                               57

165‑115J............... Object of Subdivision....................................................... 57

165‑115K.............. Application and interpretation........................................... 58

165‑115L............... Alteration time—alteration in ownership of company....... 59

165‑115M............. Alteration time—alteration in control of company............ 61

165‑115N.............. Alteration time—declaration by liquidator or administrator 62

165‑115P............... Notional alteration time—disposal of interests in company within 12 months before alteration time       62

165‑115Q.............. Notional alteration time—disposal of interests in company earlier than 12 months before alteration time.......................................................................................... 63

165‑115R.............. When company is a loss company at first or only alteration time in income year     65

165‑115S............... When company is a loss company at second or later alteration time in income year 67

165‑115T............... Reduction of certain amounts included in company’s overall loss at alteration time 69

165‑115U.............. Adjusted unrealised loss................................................... 69

165‑115V.............. Notional losses................................................................. 72

165‑115W............. Calculation of trading stock decrease................................ 73

165‑115X.............. Relevant equity interest..................................................... 74

165‑115Y.............. Relevant debt interest........................................................ 77

165‑115Z............... What constitutes a controlling stake in a company............ 80

165‑115ZA............ Reductions and other consequences if entity has relevant equity interest or relevant debt interest in loss company immediately before alteration time..................... 81

165‑115ZB............ Adjustment amounts for the purposes of section 165‑115ZA  85

165‑115ZC............ Notices to be given........................................................... 88

165‑115ZD............ Adjustment (or further adjustment) for interest realised at a loss after global method has been used       92

Subdivision 165‑C—Deducting bad debts                                                          96

Guide to Subdivision 165‑C                                                                                   96

165‑117................. What this Subdivision is about......................................... 96

Operative provisions                                                                                               97

165‑119................. Application of Subdivision............................................... 97

165‑120................. To deduct a bad debt......................................................... 97

165‑123................. Company must maintain the same owners........................ 99

165‑126................. Alternatively, the company must satisfy the same business test               101

165‑129................. Same people must control the voting power, or the company must satisfy the same business test           102

165‑132................. When tax losses resulting from bad debts cannot be deducted 103

Subdivision 165‑D—Tests for finding out whether the company has maintained the same owners          104

The primary and alternative tests                                                                      105

165‑150................. Who has more than 50% of the voting power in the company 105

165‑155................. Who has rights to more than 50% of the company’s dividends               105

165‑160................. Who has rights to more than 50% of the company’s capital distributions                106

165‑165................. Rules about tests for a condition or occurrence of a circumstance            107

165‑175................. Tests can be satisfied by a single person......................... 109

Rules affecting the operation of the tests                                                          109

165‑180................. Arrangements affecting beneficial ownership of shares.. 109

165‑185................. Shares treated as not having carried rights...................... 110

165‑190................. Shares treated as always having carried rights................ 110

165‑200................. Rules do not affect totals of shares, units in unit trusts or rights carried by shares and units   111

165‑202................. Shares held by government entities and charities etc....... 112

165‑203................. Companies where no shares have been issued................ 112

165‑205................. Death of share owner...................................................... 112

165‑207................. Trustees of family trusts................................................. 113

165‑208................. Companies in liquidation etc........................................... 114

165‑209................. Dual listed companies..................................................... 116

Subdivision 165‑E—The same business test                                                    116

165‑210................. The test........................................................................... 116

165‑212D.............. Restructure of MDOs etc................................................ 117

165‑212E............... Entry history rule does not apply for the purposes of section 165‑210    117

Subdivision 165‑F—Special provisions relating to ownership by non‑fixed trusts       118

165‑215................. Special alternative to change of ownership test for Subdivision 165‑A   118

165‑220................. Special alternative to change of ownership test for Subdivision 165‑B    120

165‑225................. Special way of dividing the income year under Subdivision 165‑B         121

165‑230................. Special alternative to change of ownership test for Subdivision 165‑C    122

165‑235................. Information about non‑fixed trusts with interests in company 124

165‑240................. Notices where requirements of section 165‑235 are met. 126

165‑245................. When an entity has a fixed entitlement to income or capital of a company               127

Subdivision 165‑G—Other special provisions                                                127

165‑250................. Control of companies in liquidation etc........................... 127

165‑255................. Incomplete periods.......................................................... 128

Division 166—Income tax consequences of changing ownership or control of a widely held or eligible Division 166 company                                                                    130

Guide to Division 166                                                                                            130

166‑1..................... What this Division is about............................................. 130

Subdivision 166‑AA—The object of this Division                                          131

166‑3..................... The object of this Division.............................................. 131

Subdivision 166‑A—Deducting tax losses of earlier income years           131

166‑5..................... How Subdivision 165‑A applies to a widely held or eligible Division 166 company              132

166‑15................... Companies can choose that this Subdivision is not to apply to them        133

Subdivision 166‑B—Working out the taxable income, tax loss, net capital gain and net capital loss for the income year of the change                                                                    134

166‑20................... How Subdivisions 165‑B and 165‑CB apply to a widely held or eligible Division 166 company           134

166‑25................... How to work out the taxable income, tax loss, net capital gain and net capital loss  136

166‑35................... Companies can choose that this Subdivision is not to apply to them        136

Subdivision 166‑C—Deducting bad debts                                                        137

166‑40................... How Subdivision 165‑C applies to a widely held or eligible Division 166 company              137

166‑50................... Companies can choose that this Subdivision is not to apply to them        139

Subdivision 166‑CA—Changeover times and alteration times                  139

166‑80................... How Subdivision 165‑CC or 165‑CD applies to a widely held or eligible Division 166 company         139

166‑90................... Companies can choose that this Subdivision is not to apply to them        141

Subdivision 166‑D—Tests for finding out whether the widely held or eligible Division 166 company has maintained the same owners                                                                        141

Guide to Subdivision 166‑D                                                                                 141

166‑135................. What this Subdivision is about....................................... 141

The ownership tests: substantial continuity of ownership                            142

166‑145................. The ownership tests: substantial continuity of ownership 142

166‑165................. Relationship with rules in Division 165.......................... 144

Corporate change in a company                                                                        144

166‑175................. Corporate change in a company...................................... 144

Subdivision 166‑E—Concessional tracing rules                                            145

Guide to Subdivision 166‑E                                                                                 145

166‑215................. What this Subdivision is about....................................... 145

Application of this Subdivision                                                                           147

166‑220................. Application of this Subdivision...................................... 147

Stakes of less than 10% in the tested company                                               147

166‑225................. Direct stakes of less than 10% in the tested company..... 147

166‑230................. Indirect stakes of less than 10% in the tested company... 149

166‑235................. Voting, dividend and capital stakes................................. 151

Stakes held directly and/or indirectly by widely held companies              153

166‑240................. Stakes held directly and/or indirectly by widely held companies              153

166‑245................. Stakes held by other entities............................................ 155

When identity of foreign stakeholders is not known                                     158

166‑255................. Bearer shares in foreign listed companies....................... 158

166‑260................. Depository entities holding stakes in foreign listed companies                160

Other rules relating to voting power and rights                                             162

166‑265................. Persons who actually control voting power or have rights are taken not to control power or have rights........................................................................................ 162

166‑270................. Single notional entity stakeholders taken to have minimum voting control, dividend rights and capital rights........................................................................................ 163

166‑272................. Same shares or interests to be held................................. 164

When the rules in this Subdivision do not apply                                             167

166‑275................. Rules in this Subdivision intended to be concessional.... 167

166‑280................. Controlled test companies............................................... 168

Division 167—Companies whose shares carry unequal rights to dividends, capital distributions or voting power                                                                                                      170

Guide to Division 167                                                                                            170

167‑1..................... What this Division is about............................................. 170

Subdivision 167‑A—Rights to dividends or capital distributions              170

Guide to Subdivision 167‑A                                                                                 170

167‑5..................... What this Subdivision is about....................................... 170

167‑7..................... Simplified outline of this Subdivision............................. 171

Operative provisions                                                                                             172

167‑10................... When this Subdivision applies........................................ 172

167‑15................... First way—disregard debt interests................................ 174

167‑20................... Second way—also disregard secondary share classes.... 174

167‑25................... Third way—treat remaining shares as having fixed rights to dividends and capital distributions             175

167‑30................... Fixing rights if practicable to work out market values.... 176

167‑35................... Fixing rights if impracticable to work out market values etc. 176

167‑40................... The valuing times for conditions listed in subsection 167‑10(1)              177

Subdivision 167‑B—Voting power                                                                     178

Guide to Subdivision 167‑B                                                                                 178

167‑75................... What this Subdivision is about....................................... 178

Operative provisions                                                                                             178

167‑80................... When this Subdivision applies........................................ 178

167‑85................... Different method for working out voting power............. 179

167‑90................... Dual listed companies..................................................... 180

Division 170—Treatment of certain company groups for income tax purposes              181

Subdivision 170‑A—Transfer of tax losses within certain wholly‑owned groups of companies                181

Guide to Subdivision 170‑A                                                                                 181

170‑1..................... What this Subdivision is about....................................... 181

170‑5..................... Basic principles for transferring tax losses..................... 182

Effect of transferring a tax loss                                                                         183

170‑10................... When a company can transfer a tax loss......................... 183

170‑15................... Income company is taken to have incurred transferred loss 183

170‑20................... Who can deduct transferred loss..................................... 184

170‑25................... Tax treatment of consideration for transferred tax loss... 184

Conditions for transfer                                                                                         185

170‑30................... Companies must be in existence and members of the same wholly‑owned group etc.             185

170‑32................... Tax loss incurred by the loss company because of a transfer under Subdivision 707‑A          186

170‑33................... Alternative test of relations between the loss company and other companies           187

170‑35................... The loss company........................................................... 189

170‑40................... The income company...................................................... 190

170‑42................... If the income company has become the head company of a consolidated group or MEC group              191

170‑45................... Maximum amount that can be transferred....................... 192

170‑50................... Transfer by written agreement........................................ 195

170‑55................... Losses must be transferred in order they are incurred..... 195

170‑60................... Income company cannot transfer transferred tax loss..... 196

Effect of agreement to transfer more than can be transferred                  196

170‑65................... Agreement transfers as much as can be transferred........ 196

170‑70................... Amendment of assessments............................................ 197

Australian permanent establishments of foreign financial entities           197

170‑75................... Treatment like Australian branches of foreign banks...... 197

Subdivision 170‑B—Transfer of net capital losses within certain wholly‑owned groups of companies  198

Guide to Subdivision 170‑B                                                                                 198

170‑101................. What this Subdivision is about....................................... 198

170‑105................. Basic principles for transferring a net capital loss........... 199

Effect of transferring a net capital loss                                                            200

170‑110................. When a company can transfer a net capital loss.............. 200

170‑115................. Who can apply transferred loss....................................... 200

170‑120................. Gain company is taken to have made transferred loss..... 201

170‑125................. Tax treatment of consideration for transferred tax loss... 201

Conditions for transfer                                                                                         202

170‑130................. Companies must be in existence and members of the same wholly‑owned group etc.             202

170‑132................. Net capital loss made by the loss company because of a transfer under Subdivision 707‑A    203

170‑133................. Alternative test of relations between the loss company and other companies           204

170‑135................. The loss company........................................................... 206

170‑140................. The gain company........................................................... 207

170‑142................. If the gain company has become the head company of a consolidated group or MEC group   208

170‑145................. Maximum amount that can be transferred....................... 209

170‑150................. Transfer by written agreement........................................ 212

170‑155................. Losses must be transferred in order they are made......... 213

170‑160................. Gain company cannot transfer transferred net capital loss 213

Effect of agreement to transfer more than can be transferred                  213

170‑165................. Agreement transfers as much as can be transferred........ 213

170‑170................. Amendment of assessments............................................ 214

Australian permanent establishments of foreign financial entities           214

170‑174................. Treatment like Australian branches of foreign banks...... 214

Subdivision 170‑C—Provisions applying to both transfers of tax losses and transfers of net capital losses within wholly‑owned groups of companies                                     215

Guide to Subdivision 170‑C                                                                                 215

170‑201................. What this Subdivision is about....................................... 215

Operative provisions                                                                                             216

170‑205................. Object of Subdivision..................................................... 216

170‑210................. Transfer of tax loss: direct and indirect interests in the loss company      216

170‑215................. Transfer of tax loss: direct and indirect interests in the income company 219

170‑220................. Transfer of net capital loss: direct and indirect interests in the loss company           222

170‑225................. Transfer of net capital loss: direct and indirect interests in the gain company           224

Subdivision 170‑D—Transactions by a company that is a member of a linked group 227

Guide to Subdivision 170‑D                                                                                 227

170‑250................. What this Subdivision is about....................................... 227

Operative provisions                                                                                             228

170‑255................. Application of Subdivision............................................. 228

170‑260................. Linked group.................................................................. 230

170‑265................. Connected entity............................................................. 231

170‑270................. Immediate consequences for originating company.......... 232

170‑275................. Subsequent consequences for originating company........ 233

170‑280................. What happens if certain events happen in respect of the asset  234

Division 175—Use of a company’s tax losses or deductions to avoid income tax            237

Guide to Division 175                                                                                            237

175‑1..................... What this Division is about............................................. 237

Subdivision 175‑A—Tax benefits from unused tax losses                           237

175‑5..................... When Commissioner can disallow deduction for tax loss 238

175‑10................... First case: income or capital gain injected into company because of available tax loss             238

175‑15................... Second case: someone else obtains a tax benefit because of tax loss available to company      239

Subdivision 175‑B—Tax benefits from unused deductions                         240

175‑20................... Income or capital gain injected into company because of available deductions         240

175‑25................... Deduction injected into company because of available income or capital gain          241

175‑30................... Someone else obtains a tax benefit because of a deduction, income or capital gain available to company........................................................................................ 242

175‑35................... Tax loss resulting from disallowed deductions............... 243

Subdivision 175‑CA—Tax benefits from unused net capital losses of earlier income years      244

175‑40................... When Commissioner can disallow net capital loss of earlier income year                244

175‑45................... First case: capital gain injected into company because of available net capital loss   245

175‑50................... Second case: someone else obtains a tax benefit because of net capital loss available to company           246

Subdivision 175‑CB—Tax benefits from unused capital losses of the current year     246

175‑55................... When Commissioner can disallow capital loss of current year 247

175‑60................... Capital gain injected into company because of available capital loss        247

175‑65................... Capital loss injected into company because of available capital gain        248

175‑70................... Someone else obtains a tax benefit because of capital loss or gain available to company         248

175‑75................... Net capital loss resulting from disallowed capital losses. 249

Subdivision 175‑C—Tax benefits from unused bad debt deductions        250

175‑80................... When Commissioner can disallow deduction for bad debt 250

175‑85................... First case: income or capital gain injected into company because of available bad debt            250

175‑90................... Second case: someone else obtains a tax benefit because of bad debt deduction available to company    251

Subdivision 175‑D—Common rules                                                                  252

175‑95................... When a person has a shareholding interest in the company 252

175‑100................. Commissioner may disallow excluded losses etc. of insolvent companies               253

Division 180—Information about family trusts with interests in companies      254

Guide to Division 180                                                                                            254

180‑1..................... What this Division is about............................................. 254

Subdivision 180‑A—Information relevant to Division 165                         254

180‑5..................... Information about family trusts with interests in companies 254

180‑10................... Notice where requirements of section 180‑5 are met...... 256

Subdivision 180‑B—Information relevant to Division 175                         259

180‑15................... Information about family trusts with interests in companies 259

180‑20................... Notice where requirements of section 180‑15 are met.... 260

Division 195—Special types of company                                                        263

Subdivision 195‑A—Pooled development funds (PDFs)                               263

Guide to Subdivision 195‑A                                                                                 263

195‑1..................... What this Subdivision is about....................................... 263

Working out a PDF’s taxable income and tax loss                                        264

195‑5..................... Deductibility of PDF tax losses...................................... 264

195‑10................... PDF cannot transfer tax loss........................................... 264

195‑15................... Tax loss for year in which company becomes a PDF..... 264

Working out a PDF’s net capital gain and net capital loss                          265

195‑25................... Applying a PDF’s net capital losses............................... 265

195‑30................... PDF cannot transfer net capital loss................................ 265

195‑35................... Net capital loss for year in which company becomes a PDF 265

Subdivision 195‑B—Limited partnerships                                                      267

Guide to Subdivision 195‑B                                                                                 267

195‑60................... What this Subdivision is about....................................... 267

Operative provisions                                                                                             267

195‑65................... Tax losses cannot be transferred to a VCLP, an ESVCLP, an AFOF or a VCMP  267

195‑70................... Previous tax losses can be deducted after ceasing to be a VCLP, an ESVCLP, an AFOF or a VCMP   268

195‑75................... Determinations to take account of income years of less than 12 months  268

Division 197—Tainted share capital accounts                                            269

Guide to Division 197                                                                                            269

197‑1..................... What this Division is about............................................. 269

Subdivision 197‑A—What transfers into a company’s share capital account does this Division apply to?            270

197‑5..................... Division generally applies to an amount transferred to share capital account from another account         270

197‑10................... Exclusion for amounts that could be identified as share capital                271

197‑15................... Exclusion for amounts transferred under debt/equity swaps 271

197‑20................... Exclusion for amounts transferred leading to there being no shares with a par value—non‑Corporations Act companies....................................................................... 271

197‑25................... Exclusion for transfers from option premium reserves... 272

197‑30................... Exclusion for transfers made in connection with demutualisations of non‑insurance etc. companies       272

197‑35................... Exclusion for transfers made in connection with demutualisations of insurance etc. companies              274

197‑37................... Exclusion for transfers made in connection with demutualisations of private health insurers  275

197‑38................... Exclusion for transfers connected with demutualisations of friendly society health or life insurers         276

197‑40................... Exclusion for post‑demutualisation transfers relating to life insurance companies   277

197‑42................... Exclusion for exploration credits.................................... 279

Subdivision 197‑B—Consequence of transfer: franking debit arises       279

197‑45................... A franking debit arises in relation to the transfer............ 279

Subdivision 197‑C—Consequence of transfer: tainting of share capital account          280

197‑50................... The share capital account becomes tainted (if it is not already tainted)     280

197‑55................... Choosing to untaint a tainted share capital account......... 281

197‑60................... Choosing to untaint—liability to untainting tax............... 281

197‑65................... Choosing to untaint—further franking debits may arise. 283

197‑70................... Due date for payment of untainting tax........................... 284

197‑75................... General interest charge for late payment of untainting tax 284

197‑80................... Notice of liability to pay untainting tax........................... 285

197‑85................... Evidentiary effect of notice of liability to pay untainting tax 286

Part 3‑6—The imputation system                                                                             287

Division 200—Guide to Part 3‑6                                                                        287

Guide to Division 200                                                                                            287

200‑1..................... What this Division is about............................................. 287

200‑5..................... The imputation system.................................................... 287

200‑10................... Franking a distribution.................................................... 288

200‑15................... The franking account...................................................... 288

200‑20................... How a distribution is franked......................................... 288

200‑25................... A corporate tax entity must not give its members credit for more tax than the entity has paid  289

200‑30................... Benchmark rule............................................................... 289

200‑35................... Effect of receiving a franked distribution........................ 289

200‑40................... An Australian corporate tax entity can pass the benefit of having received a franked distribution on to its members......................................................................... 290

200‑45................... Special rules for franking by some entities..................... 290

Division 201—Objects and application of Part 3‑6                                  291

201‑1..................... Objects............................................................................ 291

201‑5..................... Application of this Part................................................... 291

Division 202Franking a distribution                                                            292

Subdivision 202‑A—Franking a distribution                                                  292

Guide to Subdivision 202‑A                                                                                 292

202‑1..................... What this Subdivision is about....................................... 292

Operative provisions                                                                                             292

202‑5..................... Franking a distribution.................................................... 292

Subdivision 202‑B—Who can frank a distribution?                                     293

Guide to Subdivision 202‑B                                                                                 293

202‑10................... What this Subdivision is about....................................... 293

Operative provisions                                                                                             293

202‑15................... Franking entities............................................................. 293

202‑20................... Residency requirement when making a distribution........ 294

Subdivision 202‑C—Which distributions can be franked?                          294

Guide to Subdivision 202‑C                                                                                 294

202‑25................... What this Subdivision is about....................................... 294

202‑30................... Frankable distributions................................................... 294

Operative provisions                                                                                             295

202‑35................... Object............................................................................. 295

202‑40................... Frankable distributions................................................... 295

202‑45................... Unfrankable distributions............................................... 295

202‑47................... Distributions of certain ADI profits following restructure 296

Subdivision 202‑D—Amount of the franking credit on a distribution      297

Guide to Subdivision 202‑D                                                                                 297

202‑50................... What this Subdivision is about....................................... 297

202‑55................... What is the maximum franking credit for a frankable distribution?          298

Operative provisions                                                                                             298

202‑60................... Amount of the franking credit on a distribution.............. 298

202‑65................... Where the franking credit stated in the distribution statement exceeds the maximum franking credit for the distribution...................................................................... 298

Subdivision 202‑E—Distribution statements                                                   299

Guide to Subdivision 202‑E                                                                                 299

202‑70................... What this Subdivision is about....................................... 299

Operative provisions                                                                                             299

202‑75................... Obligation to give a distribution statement...................... 299

202‑80................... Distribution statement..................................................... 300

202‑85................... Changing the franking credit on a distribution by amending the distribution statement            301

Division 203—Benchmark rule                                                                           304

Guide to Division 203                                                                                            304

203‑1..................... What this Division is about............................................. 304

203‑5..................... Benchmark rule............................................................... 304

203‑10................... Benchmark franking percentage...................................... 305

Operative provisions                                                                                             305

203‑15................... Object............................................................................. 305

203‑20................... Application of the benchmark rule.................................. 305

203‑25................... Benchmark rule............................................................... 306

203‑30................... Setting a benchmark franking percentage........................ 307

203‑35................... Franking percentage........................................................ 307

203‑40................... Franking periods—where the entity is not a private company  307

203‑45................... Franking period—private companies.............................. 308

203‑50................... Consequences of breaching the benchmark rule............. 308

203‑55................... Commissioner’s powers to permit a departure from the benchmark rule 311

Division 204—Anti‑streaming rules                                                                  313

Subdivision 204‑A—Objects and application                                                  313

204‑1..................... Objects............................................................................ 313

204‑5..................... Application..................................................................... 313

Subdivision 204‑B—Linked distributions                                                        314

Guide to Subdivision 204‑B                                                                                 314

204‑10................... What this Subdivision is about....................................... 314

Operative provisions                                                                                             314

204‑15................... Linked distributions........................................................ 314

Subdivision 204‑C—Substituting tax‑exempt bonus share for franked distributions   316

Guide to Subdivision 204‑C                                                                                 316

204‑20................... What this Subdivision is about....................................... 316

Operative provisions                                                                                             316

204‑25................... Substituting tax‑exempt bonus shares for franked distributions               316

Subdivision 204‑D—Streaming distributions                                                  318

Guide to Subdivision 204‑D                                                                                 318

204‑26................... What this Subdivision is about....................................... 318

Operative provisions                                                                                             319

204‑30................... Streaming distributions................................................... 319

204‑35................... When does a franking debit arise if the Commissioner makes a determination under paragraph 204‑30(3)(a)........................................................................................ 322

204‑40................... Amount of the franking debit.......................................... 323

204‑41................... Amount of the exempting debit....................................... 324

204‑45................... Effect of a determination about distributions to favoured members          325

204‑50................... Assessment and notice of determination......................... 325

204‑55................... Right to review where a determination made.................. 326

Subdivision 204‑E—Disclosure requirements                                                326

Guide to Subdivision 204‑E                                                                                 326

204‑65................... What this Subdivision is about....................................... 326

Operative provisions                                                                                             326

204‑70................... Application of this Subdivision...................................... 326

204‑75................... Notice to the Commissioner............................................ 327

204‑80................... Commissioner may require information where the Commissioner suspects streaming            328

Division 205—Franking accounts, franking deficit tax liabilities and the related tax offset      329

Guide to Division 205                                                                                            329

205‑1..................... What this Division is about............................................. 329

205‑5..................... Franking accounts, franking deficit tax liabilities and the related tax offset              330

Operative provisions                                                                                             331

205‑10................... Each entity that is or has been a corporate tax entity has a franking account            331

205‑15................... Franking credits.............................................................. 331

205‑20................... Paying a PAYG instalment or income tax...................... 334

205‑25................... Residency requirement for an event giving rise to a franking credit or franking debit              336

205‑30................... Franking debits............................................................... 337

205‑35................... Refund of income tax...................................................... 341

205‑40................... Franking surplus and deficit........................................... 342

205‑45................... Franking deficit tax......................................................... 342

205‑50................... Deferring franking deficit............................................... 343

205‑70................... Tax offset arising from franking deficit tax liabilities...... 344

Division 207—Effect of receiving a franked distribution                      348

Guide to Division 207                                                                                            348

207‑5..................... Overview........................................................................ 348

Subdivision 207‑A—Effect of receiving a franked distribution generally 349

Guide to Subdivision 207‑A                                                                                 349

207‑10................... What this Subdivision is about....................................... 349

Operative provisions                                                                                             350

207‑15................... Applying the general rule................................................ 350

207‑20................... General rule—gross‑up and tax offset............................ 351

Subdivision 207‑B—Franked distribution received through certain partnerships and trustees                351

Guide to Subdivision 207‑B                                                                                 351

207‑25................... What this Subdivision is about....................................... 351

Gross‑up and tax offset                                                                                         352

207‑30................... Applying this Subdivision.............................................. 352

207‑35................... Gross‑up—distribution made to, or flows indirectly through, a partnership or trustee            353

207‑37................... Attributable franked distribution—trusts........................ 355

207‑45................... Tax offset—distribution flows indirectly to an entity...... 356

Key concepts                                                                                                            357

207‑50................... When a franked distribution flows indirectly to or through an entity       357

207‑55................... Share of a franked distribution........................................ 360

207‑57................... Share of the franking credit on a franked distribution..... 364

207‑58................... Specifically entitled to an amount of a franked distribution 364

207‑59................... Franked distributions within class treated as single franked distribution  365

Subdivision 207‑C—Residency requirements for the general rule           366

Guide to Subdivision 207‑C                                                                                 366

207‑60................... What this Subdivision is about....................................... 366

207‑65................... Satisfying the residency requirement.............................. 366

Operative provisions                                                                                             367

207‑70................... Gross‑up and tax offset under section 207‑20................ 367

207‑75................... Residency requirement.................................................... 367

Subdivision 207‑D—No gross‑up or tax offset where distribution would not be taxed 368

Guide to Subdivision 207‑D                                                                                 368

207‑80................... What this Subdivision is about....................................... 368

Operative provisions                                                                                             369

207‑85................... Applying this Subdivision.............................................. 369

207‑90................... Distribution that is made to an entity............................... 369

207‑95................... Distribution that flows indirectly to an entity.................. 370

Subdivision 207‑E—Exceptions to the rules in Subdivision 207‑D            373

Guide to Subdivision 207‑E                                                                                 373

207‑105................. What this Subdivision is about....................................... 373

Operative provisions                                                                                             374

207‑110................. Effect of non‑assessable income on gross up and tax offset 374

Exempt institutions                                                                                                375

207‑115................. Which exempt institutions are eligible for a refund?....... 375

207‑117................. Residency requirement.................................................... 376

207‑119................. Entity not treated as exempt institution eligible for refund in certain circumstances 376

207‑120................. Entity may be ineligible because of a distribution event.. 377

207‑122................. Entity may be ineligible if distribution is in the form of property other than money 379

207‑124................. Entity may be ineligible if other money or property also acquired            379

207‑126................. Entity may be ineligible if distributions do not match trust share amounts               380

207‑128................. Reinvestment choice....................................................... 381

207‑130................. Controller’s liability........................................................ 383

207‑132................. Treatment of benefits provided by an entity to a controller 386

207‑134................. Entity’s present entitlement disregarded in certain circumstances             387

207‑136................. Review of certain decisions............................................ 388

Subdivision 207‑F—No gross‑up or tax offset where the imputation system has been manipulated        388

Guide to Subdivision 207‑F                                                                                  388

207‑140................. What this Subdivision is about....................................... 388

Operative provisions                                                                                             389

207‑145................. Distribution that is made to an entity............................... 389

207‑150................. Distribution that flows indirectly to an entity.................. 391

207‑155................. When is a distribution made as part of a dividend stripping operation?    394

207‑157................. Distribution washing...................................................... 395

207‑160................. Distribution that is treated as an interest payment........... 396

Division 208—Exempting entities and former exempting entities    398

Guide to Division 208                                                                                            398

208‑5..................... What is an exempting entity?.......................................... 398

208‑10................... Former exempting entities............................................... 399

208‑15................... Distributions by exempting entities and former exempting entities          399

Subdivision 208‑A—What are exempting entities and former exempting entities?      399

208‑20................... Exempting entities........................................................... 400

208‑25................... Effective ownership of entity by prescribed persons...... 400

208‑30................... Accountable membership interests.................................. 401

208‑35................... Accountable partial interests........................................... 404

208‑40................... Prescribed persons.......................................................... 405

208‑45................... Persons who are taken to be prescribed persons............. 406

208‑50................... Former exempting companies......................................... 409

Subdivision 208‑B—Franking with an exempting credit                             409

Guide to Subdivision 208‑B                                                                                 409

208‑55................... What this Subdivision is about....................................... 409

Operative provisions                                                                                             409

208‑60................... Franking with an exempting credit.................................. 409

Subdivision 208‑C—Amount of the exempting credit on a distribution   410

Guide to Subdivision 208‑C                                                                                 410

208‑65................... What this Subdivision is about....................................... 410

Operative provisions                                                                                             410

208‑70................... Amount of the exempting credit on a distribution........... 410

Subdivision 208‑D—Distribution statements                                                   411

Guide to Subdivision 208‑D                                                                                 411

208‑75................... Guide to Subdivision 208‑D........................................... 411

Operative provisions                                                                                             411

208‑80................... Additional information to be included by a former exempting entity or exempting entity        411

Subdivision 208‑E—Distributions to be franked with exempting credits to the same extent      412

Guide to Subdivision 208‑E                                                                                 412

208‑85................... What this Subdivision is about....................................... 412

Operative provisions                                                                                             412

208‑90................... All frankable distributions made within a franking period must be franked to the same extent with an exempting credit.............................................................. 412

208‑95................... Exempting percentage..................................................... 413

208‑100................. Consequences of breaching the rule in section 208‑90... 413

Subdivision 208‑F—Exempting accounts and franking accounts of exempting entities and former exempting entities                                                                                                       413

Guide to Subdivision 208‑F                                                                                  413

208‑105................. What this Subdivision is about....................................... 413

Operative provisions                                                                                             415

208‑110................. Exempting account.......................................................... 415

208‑115................. Exempting credits........................................................... 415

208‑120................. Exempting debits............................................................ 420

208‑125................. Exempting surplus and deficit......................................... 422

208‑130................. Franking credits arising because of status as exempting entity or former exempting entity      422

208‑135................. Relationships that will give rise to a franking credit under item 5 of the table in section 208‑130            429

208‑140................. Membership of the same effectively wholly‑owned group 430

208‑145................. Franking debits arising because of status as exempting entity or former exempting entity       432

208‑150................. Residency requirement.................................................... 433

208‑155................. Eligible continuing substantial member........................... 434

208‑160................. Distributions that are affected by a manipulation of the imputation system              436

208‑165................. Amount of the exempting credit or franking credit arising because of a distribution franked with an exempting credit............................................................................... 436

208‑170................. Where a determination under paragraph 177EA(5)(b) of the Income Tax Assessment Act 1936 affects part of the distribution................................................................ 437

208‑175................. When does a distribution franked with an exempting credit flow indirectly to an entity?         438

208‑180................. What is an entity’s share of the exempting credit on a distribution?         438

208‑185................. Minister may convert exempting surplus to franking credit of former exempting entity previously owned by the Commonwealth......................................................... 438

Subdivision 208‑G—Tax effects of distributions by exempting entities  440

Guide to Subdivision 208‑G                                                                                 440

208‑190................. What this Subdivision is about....................................... 440

Operative provisions                                                                                             440

208‑195................. Division 207 does not generally apply............................ 440

208‑200................. Distributions to exempting entities.................................. 441

208‑205................. Distributions to employees acquiring shares under eligible employee share schemes              441

208‑215................. Eligible employee share schemes.................................... 441

Subdivision 208‑H—Tax effect of a distribution franked with an exempting credit    443

Guide to Subdivision 208‑H                                                                                 443

208‑220................. What this Subdivision is about....................................... 443

Operative provisions                                                                                             443

208‑225................. Division 207 does not generally apply............................ 443

208‑230................. Distributions to exempting entities and former exempting entities           443

208‑235................. Distributions to employees acquiring shares under eligible employee share schemes              444

208‑240................. Distributions to certain individuals................................. 444

Division 210—Venture capital franking                                                         446

Guide to Division 210                                                                                            446

210‑1..................... Purpose of venture capital franking................................ 446

210‑5..................... How is this achieved?..................................................... 446

210‑10................... What is a venture capital credit?...................................... 447

210‑15................... What does the PDF have to do to distribute the credits?. 447

210‑20................... Limits on venture capital franking................................... 447

Subdivision 210‑A—Franking a distribution with a venture capital credit 448

Guide to Subdivision 210‑A                                                                                 448

210‑25................... What this Subdivision is about....................................... 448

Operative provisions                                                                                             448

210‑30................... Franking a distribution with a venture capital credit........ 448

Subdivision 210‑B—Participating PDFs                                                          449

Guide to Subdivision 210‑B                                                                                 449

210‑35................... What this Subdivision is about....................................... 449

Operative provisions                                                                                             449

210‑40................... What is a participating PDF............................................ 449

Subdivision 210‑C—Distributions that are frankable with a venture capital credit     449

Guide to Subdivision 210‑C                                                                                 449

210‑45................... What this Subdivision is about....................................... 449

Operative provisions                                                                                             450

210‑50................... Which distributions can be franked with a venture capital credit?            450

Subdivision 210‑D—Amount of the venture capital credit on a distribution  450

Guide to Subdivision 210‑D                                                                                 450

210‑55................... What this Subdivision is about....................................... 450

Operative provisions                                                                                             451

210‑60................... Amount of the venture capital credit on a distribution..... 451

Subdivision 210‑E—Distribution statements                                                   451

Guide to Subdivision 210‑E                                                                                 451

210‑65................... What this Subdivision is about....................................... 451

Operative provisions                                                                                             452

210‑70................... Additional information to be included when a distribution is franked with a venture capital credit          452

Subdivision 210‑F—Rules affecting the allocation of venture capital credits                453

Guide to Subdivision 210‑F                                                                                  453

210‑75................... What this Subdivision is about....................................... 453

Operative provisions                                                                                             453

210‑80................... Draining the venture capital surplus when a distribution frankable with venture capital credits is made  453

210‑81................... Distributions to be franked with venture capital credits to the same extent               454

210‑82................... Consequences of breaching the rule in section 210‑81... 454

Subdivision 210‑G—Venture capital sub‑account                                         455

Guide to Subdivision 210‑G                                                                                 455

210‑85................... What this Subdivision is about....................................... 455

210‑90................... The venture capital sub‑account...................................... 456

210‑95................... Venture capital deficit tax................................................ 456

Operative provisions                                                                                             457

210‑100................. Venture capital sub‑account............................................ 457

210‑105................. Venture capital credits..................................................... 457

210‑110................. Determining the extent to which a franking credit is reasonably attributable to a particular payment of tax........................................................................................ 458

210‑115................. Participating PDF may elect to have venture capital credits arise on its assessment day          458

210‑120................. Venture capital debits...................................................... 459

210‑125................. Venture capital debit where CGT limit is exceeded......... 460

210‑130................. Venture capital surplus and deficit.................................. 462

210‑135................. Venture capital deficit tax................................................ 462

210‑140................. Effect of a liability to pay venture capital deficit tax on franking deficit tax              463

210‑145................. Effect of a liability to pay venture capital deficit tax on the franking account           463

210‑150................. Deferring venture capital deficit...................................... 463

Subdivision 210‑H—Effect of receiving a distribution franked with a venture capital credit   464

Guide to Subdivision 210‑H                                                                                 464

210‑155................. What this Subdivision is about....................................... 464

210‑160................. The significance of a venture capital credit...................... 465

210‑165................. Recipients for whom the venture capital credit is not significant              465

Operative provisions                                                                                             466

210‑170................. Tax offset for certain recipients of distributions franked with venture capital credits               466

210‑175................. Amount of the tax offset................................................. 467

210‑180................. Application of Division 207 where the recipient is entitled to a tax offset under section 210‑170           468

Division 214—Administering the imputation system                               469

Guide to Division 214                                                                                            469

214‑1..................... Purpose of the system..................................................... 469

214‑5..................... Key features.................................................................... 469

Subdivision 214‑A—Franking returns                                                              470

Guide to Subdivision 214‑A                                                                                 470

214‑10................... What this Subdivision is about....................................... 470

Operative provisions                                                                                             471

214‑15................... Notice to give a franking return—general notice............. 471

214‑20................... Notice to a specific corporate tax entity........................... 471

214‑25................... Content and form of a franking return............................ 472

214‑30................... Franking account balance................................................ 472

214‑35................... Venture capital sub‑account balance............................... 472

214‑40................... Meaning of franking tax................................................. 473

214‑45................... Effect of a refund on franking returns............................. 473

Subdivision 214‑B—Franking assessments                                                     474

Guide to Subdivision 214‑B                                                                                 474

214‑55................... What this Subdivision is about....................................... 474

Operative provisions                                                                                             475

214‑60................... Commissioner may make a franking assessment............ 475

214‑65................... Commissioner taken to have made a franking assessment on first return 476

214‑70................... Part‑year assessment....................................................... 477

214‑75................... Validity of assessment.................................................... 477

214‑80................... Objections....................................................................... 477

Subdivision 214‑C—Amending franking assessments                                  477

Guide to Subdivision 214‑C                                                                                 477

214‑90................... What this Subdivision is about....................................... 477

Operative provisions                                                                                             478

214‑95................... Amendments within 3 years of the original assessment.. 478

214‑100................. Amended assessments are treated as franking assessments 478

214‑105................. Further return as a result of a refund affecting a franking deficit tax liability           478

214‑110................. Later amendments—on request....................................... 479

214‑115................. Later amendments—failure to make proper disclosure... 479

214‑120................. Later amendments—fraud or evasion............................. 480

214‑125................. Further amendment of an amended particular................. 480

214‑135................. Amendment on review etc.............................................. 481

214‑140................. Notice of amendments.................................................... 481

Subdivision 214‑D—Collection and recovery                                                 482

Guide to Subdivision 214‑D                                                                                 482

214‑145................. What this Subdivision is about....................................... 482

Operative provisions                                                                                             482

214‑150................. Due date for payment of franking tax............................. 482

214‑155................. General interest charge.................................................... 483

214‑160................. Refunds of amounts overpaid......................................... 484

Subdivision 214‑E—Records                                                                               484

Guide to Subdivision 214‑E                                                                                 484

214‑170................. What this Subdivision is about....................................... 484

Operative provisions                                                                                             485

214‑175................. Record keeping............................................................... 485

Division 215—Consequences of the debt/equity rules                             486

Subdivision 215‑A—Application of the imputation system to non‑share equity interests            486

215‑1..................... Application of the imputation system to non‑share equity interests          486

Subdivision 215‑B—Non‑share dividends that are unfrankable to some extent            486

Guide to Subdivision 215‑B                                                                                 486

215‑5..................... What this Subdivision is about....................................... 486

215‑10................... Certain non‑share dividends by ADIs unfrankable......... 487

215‑15................... Non‑share dividends are unfrankable if profits are unavailable                488

215‑20................... Working out the available frankable profits.................... 489

215‑25................... Anticipating available frankable profits........................... 490

Division 216—Cum dividend sales and securities lending arrangements             492

Subdivision 216‑A—Circumstances where a distribution to a member of a corporate tax entity is treated as having been made to someone else                                                     492

216‑1..................... When a distribution made to a member of a corporate tax entity is treated as having been made to someone else........................................................................................ 492

216‑5..................... First situation (cum dividend sales)................................ 492

216‑10................... Second situation (securities lending arrangements)......... 493

216‑15................... Distribution closing time................................................. 494

Subdivision 216‑B—Statements to be made where there is a cum dividend sale or securities lending arrangement                                                                                                       494

216‑20................... Cum dividend sale—statement by securities dealer......... 494

216‑25................... Cum dividend sale—statement by party.......................... 495

216‑30................... Securities lending arrangements—statement by borrower 495

Division 218—Application of imputation rules to co‑operative companies         496

218‑5..................... Application of imputation rules to co‑operative companies 496

Division 219—Imputation for life insurance companies                        497

Guide to Division 219                                                                                            497

219‑1..................... What this Division is about............................................. 497

Subdivision 219‑A—Application of imputation rules to life insurance companies       497

219‑10................... Application of imputation rules to life insurance companies 497

Subdivision 219‑B—Franking accounts of life insurance companies      498

219‑15................... Franking credits.............................................................. 498

219‑30................... Franking debits............................................................... 503

219‑40................... Residency requirement.................................................... 504

219‑45................... Assessment day.............................................................. 505

219‑50................... Amount attributable to shareholders’ share of income tax liability           505

219‑55................... Adjustment resulting from an amended assessment........ 506

219‑70................... Tax offset under section 205‑70..................................... 507

219‑75................... Working out franking credits and franking debits where a tax offset under section 205‑70 is applied     508

Division 220—Imputation for NZ resident companies and related companies  511

Guide to Division 220                                                                                            511

220‑1..................... What this Division is about............................................. 511

Subdivision 220‑A—Objects of this Division                                                   511

220‑15................... Objects............................................................................ 512

220‑20................... What is an NZ resident?.................................................. 512

Subdivision 220‑B—NZ company treated as Australian resident for imputation system if company chooses      513

220‑25................... Application of provisions of Part 3‑6 outside this Division 513

220‑30................... What is an NZ franking company?.................................. 514

220‑35................... Making an NZ franking choice....................................... 514

220‑40................... When is an NZ franking choice in force?........................ 514

220‑45................... Revoking an NZ franking choice.................................... 514

220‑50................... Cancelling an NZ franking choice................................... 514

Subdivision 220‑C—Modifications of other Divisions of this Part           515

Franking NZ franking companies’ distributions                                           517

220‑100................. Residency requirement for franking................................ 517

220‑105................. Unfrankable distributions by NZ franking companies.... 517

220‑110................. Maximum franking credit under section 202‑60............. 517

NZ franking companies’ franking accounts etc.                                            518

220‑205................. Franking credit for payment of NZ franking company’s withholding tax liability   518

220‑210................. Effect of franked distribution to NZ franking company or flowing indirectly to NZ franking company  518

220‑215................. Effect on franking account if NZ franking choice ceases to be in force    519

Franking accounts of NZ franking company and some of its 100% subsidiaries         520

220‑300................. NZ franking company’s franking account affected by franking accounts of some of its 100% subsidiaries........................................................................................ 520

Effect of NZ franking company making distribution that is non‑assessable and non‑exempt   523

220‑350................. Providing for a franking credit to arise........................... 523

Effects of supplementary dividend from NZ franking company              524

220‑400................. Gross‑up and tax offset for distribution from NZ franking company reduced by supplementary dividend........................................................................................ 524

220‑405................. Franked distribution and supplementary dividend flowing indirectly       526

220‑410................. Franking credit reduced if tax offset reduced.................. 528

Rules about exempting entities                                                                            529

220‑500................. Publicly listed post‑choice NZ franking company and its 100% subsidiaries are not exempting entities 529

220‑505................. Post‑choice NZ franking company is not automatically prescribed person              529

220‑510................. Parent company’s status as prescribed person sets status of all other members of same wholly‑owned group........................................................................................ 530

NZ franking companies’ exempting accounts                                                 531

220‑605................. Effect on exempting account if NZ franking choice ceases to be in force 531

Tax effect of distribution franked by NZ franking company with an exempting credit              532

220‑700................. Tax effect of distribution franked by NZ franking company with an exempting credit            532

Joint and several liability for NZ resident company’s unmet franking liabilities        532

220‑800................. Joint and several liability for NZ resident company’s franking tax etc.    532


Chapter 3Specialist liability rules

Part 3‑5Corporate taxpayers and corporate distributions

Division 164Non‑share capital accounts for companies

Guide to Division 164

164‑1  What this Division is about

A company that issues non‑share equity interests will have a notional account called a non‑share capital account. This account records contributions to the company in relation to those non‑share equity interests and returns made by the company of those contributions.

A non‑share distribution that represents a return of contributions is not taxed as a dividend (subject to the anti‑avoidance provisions dealing with dividend substitution). In certain circumstances a company may use its share capital account as the source for such distributions.

Table of sections

Operative provisions

164‑5        Object

164‑10      Non‑share capital account

164‑15      Credits to non‑share capital account

164‑20      Debits to non‑share capital account

Operative provisions

164‑5  Object

             (1)  This Division provides for the *non‑share capital account through which a company records contributions made to it in respect of *non‑share equity interests and returns by it of those contributions.

             (2)  This allows a *non‑share distribution to be characterised as either:

                     (a)  a *non‑share dividend; or

                     (b)  a *non‑share capital return.

164‑10  Non‑share capital account

             (1)  A company has a non‑share capital account if:

                     (a)  the company issues a *non‑share equity interest in the company on or after 1 July 2001; or

                     (b)  the company has issued a non‑share equity interest in the company before 1 July 2001 that is still in existence on 1 July 2001; or

                     (c)  a *debt interest in the company changes at a particular time (the change time) to an *equity interest in the company because of subsection 974‑110(1) or (2); or

                     (d)  the following conditions are satisfied in relation to an interest in the company:

                              (i)  immediately before subsection 974‑75(4) ceases to have effect, the interest is taken to be a debt interest in the company because of that subsection;

                             (ii)  the interest is an equity interest in the company at the time (the change time) that is immediately after that cessation;

                            (iii)  subsection 974‑75(6) does not apply to the interest in relation to the income year that includes the change time; or

                     (e)  the following conditions are satisfied in relation to an interest in the company:

                              (i)  subsection 974‑75(6) applies to the interest in relation to a particular income year;

                             (ii)  that subsection does not apply to the interest in relation to the next income year;

                            (iii)  the interest is an equity interest in the company at the time (the change time) that is the start of that next income year.

             (2)  The account continues in existence even if the company ceases to have any *non‑share equity interests on issue.

             (3)  The balance of the account cannot fall below nil.

             (4)  The only credits and debits that may be made to the account are those provided for in sections 164‑15 and 164‑20.

164‑15  Credits to non‑share capital account

             (1)  If the company issues a *non‑share equity interest in the company on or after 1 July 2001, there is a credit to the *non‑share capital account equal to:

where:

amount received is the *market value, when it is provided, of the consideration the company receives for the issue of the interest.

share capital account credit is the amount of any credit made to the company’s *share capital account in respect of the issue of the interest.

Note:          The issue of a non‑share equity interest can give rise to a credit to the company’s share capital account if the interest consists, for example, of a stapled security that includes a share in the company’s capital.

             (2)  If paragraph 164‑10(1)(c), (d) or (e) applies in relation to a particular interest in the company, there is a credit to the *non‑share capital account at the change time referred to in that paragraph of an amount equal to:

where:

amount received is the *market value, when it was provided, of the consideration the company received for the issue of the interest.

amount returned is so much of the amount received as has been returned to a holder of the interest before the change time.

share capital account credit is the amount of any credit made to the company’s *share capital account in respect of the issue of the interest.

             (3)  If the company has a *non‑share capital account at the beginning of 1 July 2001 because of a *non‑share equity interest the company issued before 1 July 2001, there is a credit to the non‑share capital account on that day for each non‑share equity interest in the company that:

                     (a)  was issued before 1 July 2001; and

                     (b)  is still in existence on 1 July 2001.

             (4)  The amount of the credit under subsection (3) is:

where:

amount received is the *market value, when it is provided, of the consideration the company receives for the issue of the interest.

return of amount received is the sum of the amounts paid before 1 July 2001 by way of return, in whole or in part, of the amount received.

share capital account credit is the sum of any amounts credited before 1 July 2001 to the company’s *share capital account in respect of the issue of the interest.

             (5)  To avoid doubt, if:

                     (a)  it appears that a credit to the company’s *non‑share capital account has arisen under this section because an interest in the company appears to be, or have become, an *equity interest at a time in a particular income year; and

                     (b)  because subsection 974‑75(6) or 974‑110(1A) is subsequently found to apply in relation to the interest and that income year, the interest was not in fact, or did not in fact become, an equity interest at that time;

the credit referred to in paragraph (a) is taken never to have arisen.

164‑20  Debits to non‑share capital account

             (1)  The company may debit the whole or a part of a *non‑share distribution against the company’s *non‑share capital account:

                     (a)  to the extent to which the distribution is made as consideration for the surrender, cancellation or redemption of a *non‑share equity interest in the company; or

                     (b)  to the extent to which:

                              (i)  the distribution is made in connection with a reduction in the *market value of a non‑share equity interest in the company; and

                             (ii)  the amount of the distribution is equal to the amount of the reduction in market value.

             (2)  The total of the amounts debited to the account in respect of a particular *non‑share equity interest must not exceed the total of the amounts credited to the account in respect of the interest.

             (3)  If:

                     (a)  an *equity interest in the company changes at a particular time (the change time) to a *debt interest in the company because of subsection 974‑110(1) or (2); or

                     (b)  an equity interest in the company changes to a debt interest in the company, with effect from a time (the change time) that is the start of a particular income year, because of subsection 974‑110(1A); or

                     (c)  the following conditions are satisfied in relation to an interest in the company:

                              (i)  subsection 974‑75(6) does not apply to the interest in relation to a particular income year;

                             (ii)  the interest is an equity interest in the company at the end of that income year;

                            (iii)  subsection 974‑75(6) applies to the interest from the time (the change time) that is the start of the next income year;

there is, or is taken to have been, a debit to the *non‑share capital account at the change time equal to:

where:

credits in relation to the interest is the sum of all the credits that have been made to the *non‑share capital account in relation to the interest before the change time.

debits in relation to the interest is the sum of all the debits that have been made to the *non‑share capital account in relation to the interest before the change time.

             (4)  To avoid doubt, if:

                     (a)  it appears that a debit to the company’s *non‑share capital account has arisen because an interest in the company appears to be, or have become, a *debt interest at a time in a particular income year; and

                     (b)  because subsection 974‑75(6) or 974‑110(1A) is subsequently found not to apply in relation to the interest and that income year, the interest was not in fact, or did not in fact become, a debt interest at that time;

the debit referred to in paragraph (a) is taken never to have arisen.

Division 165Income tax consequences of changing ownership or control of a company

Table of Subdivisions

             Guide to Division 165

165‑A   Deducting tax losses of earlier income years

165‑B    Working out the taxable income and tax loss for the income year of the change

165‑CA Applying net capital losses of earlier income years

165‑CB Working out the net capital gain and the net capital loss for the income year of the change

165‑CC Change of ownership or control of company that has an unrealised net loss

165‑CD Reductions after alterations in ownership or control of loss company

165‑C    Deducting bad debts

165‑D   Tests for finding out whether the company has maintained the same owners

165‑E    The same business test

165‑F    Special provisions relating to ownership by non‑fixed trusts

Guide to Division 165

165‑1  What this Division is about

A change in the ownership or control of a company can affect:

     •   whether it can deduct its tax losses of earlier income years; and

     •   how it calculates its taxable income and tax loss for the income year of the change; and

     •   whether it can deduct debts owed to it that are written off as bad.

Subdivision 165‑ADeducting tax losses of earlier income years

Guide to Subdivision 165‑A

165‑5  What this Subdivision is about

A company cannot deduct a tax loss unless:

               (a)     it has the same owners and the same control throughout the period from the start of the loss year to the end of the income year; or

              (b)     it satisfies the same business test by carrying on the same business, entering into no new kinds of transactions and conducting no new kinds of business.

                   Note:             The exceptions mentioned in this section apply differently in relation to designated infrastructure project entities: see section 415‑35.

Table of sections

Operative provisions

165‑10      To deduct a tax loss

165‑12      Company must maintain the same owners

165‑13      Alternatively, the company must satisfy the same business test

165‑15      The same people must control the voting power, or the company must satisfy the same business test

165‑20      When company can deduct part of a tax loss

Operative provisions

165‑10  To deduct a tax loss

                   A company cannot deduct a *tax loss unless either:

                     (a)  it meets the conditions in section 165‑12 (which is about the company maintaining the same owners); or

Note:       See section 165‑215 for a special alternative to these conditions.

                     (b)  it meets the condition in section 165‑13 (which is about the company satisfying the same business test).

Note:          In the case of a widely held or eligible Division 166 company, Subdivision 166‑A modifies how this Subdivision applies, unless the company chooses otherwise.

165‑12  Company must maintain the same owners

Ownership test period

             (1)  In determining whether section 165‑10 prevents a company from deducting a *tax loss, the ownership test period is the period from the start of the *loss year to the end of the income year.

Note:          See section 165‑255 for the rule about incomplete test periods.

Voting power

             (2)  There must be persons who had *more than 50% of the voting power in the company at all times during the *ownership test period.

Note 1:       See section 165‑150 to work out who had more than 50% of the voting power.

Note 2:       Subdivision 167‑B has special rules for working out voting power in a company whose shares do not all carry the same voting rights, or do not carry all of the voting rights in the company.

Rights to dividends

             (3)  There must be persons who had rights to *more than 50% of the company’s dividends at all times during the *ownership test period.

Note 1:       See section 165‑155 to work out who had rights to more than 50% of the company’s dividends.

Note 2:       Subdivision 167‑A has special rules for working out rights to dividends in a company whose shares do not all carry the same rights to dividends.

Rights to capital distributions

             (4)  There must be persons who had rights to *more than 50% of the company’s capital distributions at all times during the *ownership test period.

Note 1:       See section 165‑160 to work out who had rights to more than 50% of the company’s capital distributions.

Note 2:       Subdivision 167‑A has special rules for working out rights to capital distributions in a company whose shares do not all carry the same rights to capital distributions.

When to apply the primary test

             (5)  To work out whether a condition in this section was satisfied at all times during the *ownership test period, apply the primary test for that condition unless subsection (6) requires the alternative test to be applied.

Note:          For the primary test, see subsections 165‑150(1), 165‑155(1) and 165‑160(1).

When to apply the alternative test

             (6)  Apply the alternative test for that condition if one or more other companies beneficially owned *shares or interests in shares in the company at any time during the *ownership test period.

Note:          For the alternative test, see subsections 165‑150(2), 165‑155(2) and 165‑160(2).

Conditions in subsections (2), (3) and (4) may be treated as having been satisfied in certain circumstances

             (7)  If any of the conditions in subsections (2), (3) and (4) have not been satisfied, those conditions are taken to have been satisfied if:

                     (a)  they would have been satisfied except for the operation of section 165‑165; and

                     (b)  the company has information from which it would be reasonable to conclude that less than 50% of the *tax loss has been reflected in deductions, capital losses, or reduced assessable income, that occurred, or could occur in future, because of the happening of any *CGT event in relation to any *direct equity interests or *indirect equity interests in the company during the *ownership test period.

          (7A)  If the company is:

                     (a)  a *non‑profit company; or

                     (b)  a *mutual affiliate company; or

                     (c)  a *mutual insurance company;

during the whole of the *ownership test period, the conditions in subsections (3) and (4) are taken to have been satisfied by the company.

Time of happening of CGT event

             (8)  The happening of a *CGT event in relation to a *direct equity interest or *indirect equity interest in the company that results in the failure of the company to satisfy a condition in subsection (2), (3) or (4) is taken, for the purposes of paragraph (7)(b), to have occurred during the *ownership test period.

165‑13  Alternatively, the company must satisfy the same business test

             (1)  This section sets out the condition that a company must meet to be able to deduct the *tax loss if:

                     (a)  the company fails to meet a condition in subsection 165‑12(2), (3) or (4); or

                     (b)  it is not practicable to show that the company meets the conditions in those subsections.

Note           Other provisions may treat the company as meeting, or failing to meet, the conditions in subsections 165‑12(2), (3) and (4).

             (2)  The company must satisfy the *same business test for the income year (the same business test period). Apply the test to the *business the company carried on immediately before the time (the test time) shown in the relevant item of the table.

 

Test time

Item

If:

The test time is:

1

It is practicable to show there is a period that meets these conditions:

(a) the period starts at the start of the *ownership test period or, if the company came into being during the *loss year, at the time the company came into being;

(b) the company would meet the conditions in subsections 165‑12(2), (3) and (4) if the period were the ownership test period for the purposes of this Act

The latest time that it is practicable to show is in the period

2

Item 1 does not apply and the company was in being throughout the *loss year

The start of the loss year

3

Item 1 does not apply and the company came into being during the *loss year

The end of the loss year

For the same business test: see Subdivision 165‑E.

165‑15  The same people must control the voting power, or the company must satisfy the same business test

             (1)  Even if a company meets the conditions in section 165‑12 or 165‑13, it cannot deduct the *tax loss if:

                     (a)  for some or all of the part of the *ownership test period that started at the end of the *loss year, a person controlled, or was able to control, the voting power in the company (whether directly, or indirectly through one or more interposed entities); and

                     (b)  for some or all of the *loss year, that person did not control, and was not able to control, that voting power (directly, or indirectly in that way); and

                     (c)  that person began to control, or became able to control, that voting power (directly, or indirectly in that way) for the purpose of:

                              (i)  getting some benefit or advantage in relation to how this Act applies; or

                             (ii)  getting such a benefit or advantage for someone else;

                            or for purposes including that purpose.

Note:          A person can still control the voting power in a company that is in liquidation etc.: see section 165‑250.

             (2)  However, that person’s control of the voting power, or ability to control it, does not prevent the company from deducting the *tax loss if the company satisfies the *same business test for the income year (the same business test period).

             (3)  Apply the *same business test to the *business that the company carried on immediately before the time (the test time) when the person began to control that voting power, or became able to control it.

For the same business test: see Subdivision 165‑E.

165‑20  When company can deduct part of a tax loss

             (1)  If section 165‑10 (which is about deducting a tax loss) prevents a company from deducting a *tax loss, the company can deduct the part of the tax loss that was incurred during a part of the loss year.

             (2)  However, the company can do this only if, assuming that part of the *loss year had been treated as the whole of the loss year for the purposes of section 165‑10, the company would have been entitled to deduct the *tax loss.

Subdivision 165‑BWorking out the taxable income and tax loss for the income year of the change

Guide to Subdivision 165‑B

165‑23  What this Subdivision is about

A company that has not had the same ownership and control during the income year, and has not satisfied the same business test, works out its taxable income and tax loss under this Subdivision.

Table of sections

165‑25      Summary of this Subdivision

165‑30      Flow chart showing the application of this Subdivision

When a company must work out its taxable income and tax loss under this Subdivision

165‑35      On a change of ownership, unless the company satisfies the same business test

165‑37      Who has more than a 50% stake in the company during a period

165‑40      On a change of control of the voting power in the company, unless the company satisfies the same business test

Working out the company’s taxable income

165‑45      First, divide the income year into periods

165‑50      Next, calculate the notional loss or notional taxable income for each period

165‑55      How to attribute deductions to periods

165‑60      How to attribute assessable income to periods

165‑65      How to calculate the company’s taxable income for the income year

Working out the company’s tax loss

165‑70      How to calculate the company’s tax loss for the income year

Special rules that apply if the company is in partnership

165‑75      How to calculate the company’s notional loss or notional taxable income for a period when the company was a partner

165‑80      How to calculate the company’s share of a partnership’s notional loss or notional net income for a period if both entities have the same income year

165‑85      How to calculate the company’s share of a partnership’s notional loss or notional net income for a period if the entities have different income years

165‑90      Company’s full year deductions include a share of partnership’s full year deductions

165‑25  Summary of this Subdivision

             (1)  The company calculates its taxable income for the income year in this way:

Method statement

Step 1.   Divide the income year into periods: each change in ownership or control is a dividing point between periods.

Step 2.   Treat each period as if it were an income year and work out the notional loss or notional taxable income for that period.

Step 3.   Work out the taxable income for the year of the change by adding up:

                      each notional taxable income; and

                      any full year amounts (amounts of assessable income not taken into account at Step 2);

              and then subtracting any full year deductions (deductions not taken into account at Step 2).

                   Note:    Do not take into account any notional loss.

             (2)  As well as a taxable income, the company will have a tax loss. It is the total of:

•    each notional loss; and

•    excess full year deductions of particular kinds.

             (3)  Special rules apply if the company was in partnership at some time during the income year.

For the special rules that apply if the company was in partnership: see sections 165‑75 to 165‑90.

165‑30  Flow chart showing the application of this Subdivision

 

 

Note:          If the company was a partner during the income year, special rules apply to calculating a notional loss or notional taxable income.

When a company must work out its taxable income and tax loss under this Subdivision

165‑35  On a change of ownership, unless the company satisfies the same business test

                   A company must calculate its taxable income and *tax loss under this Subdivision unless:

                     (a)  there are persons who had *more than a 50% stake in the company during the whole of the income year; or

Note:       See section 165‑220 for a special alternative to the condition in this paragraph.

                     (b)  there is only part of the income year (a part that started at the start of the income year) during which the same persons had *more than a 50% stake in the company, but the company satisfies the *same business test for the rest of the income year (the same business test period); or

                     (c)  the company was a *designated infrastructure project entity during the whole of the income year.

Note:       See subsection 415‑35(7) if there is only part of the income year during which the company was a designated infrastructure project entity.

For the purposes of paragraph (b), apply the *same business test to the *business that the company carried on immediately before the time (the test time) when that part ended.

Note 1:       For the same business test, see Subdivision 165‑E.

Note 2:       In the case of a widely held or eligible Division 166 company, Subdivision 166‑B modifies how this Subdivision applies, unless the company chooses otherwise.

165‑37  Who has more than a 50% stake in the company during a period

             (1)  If:

                     (a)  there are persons who had *more than 50% of the voting power in the company during the whole of a period (the ownership test period) consisting of the income year or a part of it; and

                     (b)  there are persons who had rights to *more than 50% of the company’s dividends during the whole of the ownership test period; and

                     (c)  there are persons who had rights to *more than 50% of the company’s capital distributions during the whole of the ownership test period;

those persons had more than a 50% stake in the company during the ownership test period.

Note:          Division 167 has special rules for working out rights to voting power, dividends and capital distributions in a company whose shares do not all carry the same rights to those matters.

             (2)  To work out whether a condition in subsection (1) was satisfied during the *ownership test period, apply the primary test for that condition unless subsection (3) requires the alternative test to be applied.

For the primary tests: see subsections 165‑150(1), 165‑155(1)
 and 165‑160(1).

             (3)  Apply the alternative test for that condition if one or more other companies beneficially owned *shares, or interests in shares, in the company at any time during the *ownership test period.

For the alternative tests: see subsections 165‑150(2), 165‑155(2)
 and 165‑160(2).

Conditions in subsection (1) may be treated as having been satisfied in certain circumstances

             (4)  If any of the conditions in subsection (1) have not been satisfied, those conditions are taken to have been satisfied if:

                     (a)  they would have been satisfied except for the operation of section 165‑165; and

                     (b)  the company has information from which it would be reasonable to conclude that less than 50% of the *notional loss for the *ownership test period has been reflected in deductions, capital losses, or reduced assessable income, that occurred, or could occur in future, because of the happening of any *CGT event in relation to any *direct equity interests or *indirect equity interests in the company during that period.

          (4A)  If the company is:

                     (a)  a *non‑profit company; or

                     (b)  a *mutual affiliate company; or

                     (c)  a *mutual insurance company;

during the whole of the *ownership test period, the conditions in paragraphs (1)(b) and (c) are taken to have been satisfied by the company.

Time of happening of CGT event

             (5)  The happening of a *CGT event in relation to a *direct equity interest or *indirect equity interest in the company that results in the failure of the company to satisfy a condition in subsection (1) is taken, for the purposes of paragraph (4)(b), to have occurred during the *ownership test period.

165‑40  On a change of control of the voting power in the company, unless the company satisfies the same business test

             (1)  A company must calculate its taxable income and tax loss under this Subdivision if, during the income year, a person begins to control, or becomes able to control, the voting power in the company (whether directly, or indirectly through one or more interposed entities) for the purpose, or for purposes including the purpose, of:

                     (a)  getting some benefit or advantage in relation to how this Act applies; or

                     (b)  getting such a benefit or advantage for someone else.

Note 1:       A person can still control the voting power in a company that is in liquidation etc.: see section 165‑250.

Note 2:       Subdivision 167‑B has special rules for working out voting power in a company whose shares do not all carry the same voting rights, or do not carry all of the voting rights in the company.

             (2)  However, that person’s control of the voting power, or ability to control it, does not require the company to calculate its taxable income under this Subdivision if the company satisfies the *same business test for the rest of the income year (the same business test period).

             (3)  Apply the *same business test to the *business that the company carried on immediately before the time (the test time) when the person began to control that voting power, or became able to control it.

For the same business test: see Subdivision 165‑E.

Working out the company’s taxable income

165‑45  First, divide the income year into periods

             (1)  Divide the income year into periods as follows.

             (2)  The first period starts at the start of the income year. Each later period starts immediately after the end of the previous period.

             (3)  The last period ends at the end of the income year. Each period (except the last) ends at the earlier of:

                     (a)  the latest time that would result in persons having *more than a 50% stake in the company during the whole of the period; or

                     (b)  the earliest time when a person begins to control, or becomes able to control, the voting power in the company (whether directly, or indirectly through one or more interposed entities) for the purpose, or for purposes including the purpose, of:

                              (i)  getting some benefit or advantage to do with how this Act applies; or

                             (ii)  getting such a benefit or advantage for someone else.

Note:          See section 165‑255 for the rule about incomplete periods.

             (4)  However, what would otherwise be 2 or more successive periods are treated as a single period if the company satisfies the *same business test for all of them, considered as a single period (the same business test period). Apply the same business test to the *business the company carried on immediately before the end of the first of the periods (the test time).

Note 1:       For the same business test, see Subdivision 165‑E.

Note 2:       See section 165‑225 for a special alternative to subsections (3) and (4) of this section.

165‑50  Next, calculate the notional loss or notional taxable income for each period

             (1)  The company has a *notional loss for a period if the deductions attributed to the period under section 165‑55 exceed the assessable income attributed to the period under section 165‑60. The notional loss is the amount of the excess.

For a period during which the company was in partnership,
 the notional loss is worked out under section 165‑75.

             (2)  On the other hand, if that assessable income exceeds those deductions, the company has a notional taxable income for the period, equal to the excess.

For a period during which the company was in partnership,
 the notional taxable income is worked out under section 165‑75.

             (3)  If the company has a *notional loss for none of the periods in the income year, this Subdivision has no further application, and the company’s taxable income for the income year is calculated in the usual way.

The usual way of working out taxable income is set out in section 4‑15.

165‑55  How to attribute deductions to periods

             (1)  The company’s deductions for the income year are attributed to periods in the income year as follows.

             (2)  The following deductions are attributed to each period in proportion to the length of the period:

                     (a)  deductions for the decline in value of a *depreciating asset;

See Division 40.

                     (b)  deductions for *exploration or prospecting, or *mining capital expenditure, in connection with mining or quarrying;

See section 40‑80 and Subdivisions 40‑H and 40‑I.

                     (c)  deductions for expenditure, deductions for which are spread over 2 or more income years, but not:

                              (i)  deductions for exploration or prospecting, or capital expenditure, in connection with mining or quarrying; or

See Subdivision 40‑I.

                             (ii)  *full year deductions (see subsection (5));

                     (d)  deductions for expenditure of capital monies in connection with an Australian *film.

See former section 124ZAFA of the Income Tax Assessment Act 1936.

             (3)  All other deductions (except *full year deductions) are attributed to periods as if each period were an income year.

             (4)  *Full year deductions are not attributed to any of the periods. They are brought in at a later stage of the process of calculating the company’s taxable income for the income year.

             (5)  These are full year deductions:

                     (a)  deductions for bad debts under section 8‑1 (about general deductions) or section 25‑35 (about bad debts);

                     (b)  deductions for losses on debt/equity swaps under section 63E of the Income Tax Assessment Act 1936;

                     (c)  deductions, so far as they are allowable under Division 8 (which is about deductions) because Subdivision H (Period of deductibility of certain advance expenditure) of Division 3 of Part III of the Income Tax Assessment Act 1936 applies to the company in relation to the income year;

                    (fa)  deductions for payments of pensions, gratuities or retiring allowances under section 25‑50;

                    (fb)  deductions for gifts under Division 30;

                      (f)  deductions for *tax losses of earlier income years.

See Division 36.

             (6)  However, a deduction for the balance of capital expenditure is not a full year deduction if the deduction results from the disposal, loss, lapse, termination of use or destruction of the property.

165‑60  How to attribute assessable income to periods

             (1)  The company’s assessable income for the income year is attributed to periods in the income year as follows.

             (2)  The following amounts are attributed to periods so far as they are reasonably attributable to those periods:

                     (a)  amounts included in the company’s assessable income under section 97 (Beneficiary of a trust estate who is not under a legal disability) of the Income Tax Assessment Act 1936; or

                     (b)  amounts included in the company’s assessable income under section 98A (Non‑resident beneficiaries assessable in respect of certain income) of the Income Tax Assessment Act 1936.

          (2A)  However, so much of an amount included in the company’s assessable income under section 97 or 98A of the Income Tax Assessment Act 1936 as is a *capital gain that forms part of a *net capital gain is not attributed to a period.

             (3)  The following items of assessable income are attributed to each period in proportion to the length of the period:

                     (a)  insurance recoveries for loss of livestock or trees;

See section 385‑130.

                     (b)  amounts included in assessable income as a result of elections relating to the forced disposal of livestock;

See Subdivision 385‑E and section 385‑160.

                     (c)  recoupment of mains electricity connection expenditure.

See items 1.16 and 2.5 in section 20‑30, which lists deductions for which recoupments are assessable under Subdivision 20‑A.

             (4)  An amount included in the company’s assessable income under section 385‑135 (Election to defer including profit on second wool clip) is attributed to the period when the wool would ordinarily have been shorn.

             (5)  An amount included in the company’s assessable income that is a *dividend under:

                     (a)  section 65 (Payments to associated persons); or

                     (c)  section 109 (Excessive payments to shareholders and associates);

of the Income Tax Assessment Act 1936 is attributed to the period when the amount was paid or credited, whichever occurred first.

             (6)  All other items of assessable income (except *full year amounts) are attributed to periods as if each period were an income year.

          (6A)  A *net capital gain is not attributed to a period.

Note:          This is because Subdivision 165‑CB provides for how the company must work out its net capital gain for the income year.

             (7)  Full year amounts are amounts referred to in paragraphs (2)(a) and (b), so far as they are not reasonably attributable to a period, but do not include any part of a *capital gain that forms part of a *net capital gain. Full year amounts are brought in at a later stage of the process of calculating the company’s taxable income for the income year.

165‑65  How to calculate the company’s taxable income for the income year

             (1)  The company’s taxable income for the income year is calculated as follows.

             (2)  Add up the *notional taxable incomes (if any) worked out under section 165‑50 or 165‑75.

Note:          A notional loss for a period is not taken into account, but counts towards the company’s tax loss for the income year.

             (3)  Add the *full year amounts referred to in subsection 165‑60(7) (if any) and any *net capital gain of the company for the income year.

             (4)  Subtract the company’s *full year deductions of these kinds:

                     (a)  deductions for bad debts under section 8‑1 (about general deductions) or section 25‑35 (about bad debts);

                     (c)  deductions, so far as they are allowable under Division 8 (which is about deductions) because Subdivision H (Period of deductibility of certain advance expenditure) of Division 3 of Part III of the Income Tax Assessment Act 1936 applies to the company in relation to the income year;

unless they exceed the total of the *notional taxable incomes and the *full year amounts. (If they equal or exceed that total, the company does not have a taxable income for the income year.)

             (5)  If an amount remains, subtract from it the company’s other *full year deductions, in the order shown in subsection 165‑55(5), unless they exceed the amount remaining. (If they equal or exceed that amount, the company does not have a taxable income for the income year.)

             (6)  If an amount remains, it is the company’s taxable income for the income year.

Working out the company’s tax loss

165‑70  How to calculate the company’s tax loss for the income year

             (1)  The company’s tax loss for the income year is calculated as follows.

             (2)  Total the *notional losses worked out under section 165‑50 or 165‑75.

             (3)  Add to the total in subsection (2) the amount (if any) by which the company’s *full year deductions of these kinds:

                     (a)  deductions for bad debts under section 8‑1 (about general deductions) or section 25‑35 (about bad debts);

                     (c)  deductions, so far as they are allowable under Division 8 (which is about deductions) because Subdivision H (Period of deductibility of certain advance expenditure) of Division 3 of Part III of the Income Tax Assessment Act 1936 applies to the company in relation to the income year;

exceed the total of:

                     (d)  the *notional taxable incomes (if any); and

To work out the notional taxable income: see section 165‑50.

                     (e)  the *full year amounts referred to in section 165‑60 (if any); and

                      (f)  any *net capital gain of the company for the income year.

             (4)  If the company *derived exempt income, subtract its *net exempt income (worked out under section 36‑20).

             (5)  Any amount remaining is the company’s tax loss for the income year, which is called a loss year.

Note:          The meanings of tax loss and loss year are modified by section 36‑55 for a corporate tax entity that has an amount of excess franking offsets.

To find out how much of the tax loss can be deducted in later income years: see Subdivision 165‑A.
To find out how to deduct it: see section 36‑17.

Special rules that apply if the company is in partnership

165‑75  How to calculate the company’s notional loss or notional taxable income for a period when the company was a partner

             (1)  This section applies if at any time during a period the company was a partner in one or more partnerships.

             (2)  The company has a *notional loss for the period if the total (the loss total) of:

                     (a)  the deductions attributed to the period under section 165‑55; and

                     (b)  the *company’s share of each *notional loss (if any) of a partnership for the period;

exceeds the total (the income total) of:

                     (c)  the assessable income attributed to the period under section 165‑60; and

                     (d)  the *company’s share of each *notional net income (if any) of a partnership for the period.

The notional loss is the amount of the excess.

Note:          A notional loss is taken into account in working out the company’s tax loss under section 165‑70.

             (3)  On the other hand, if the income total exceeds the loss total, the company has a notional taxable income for the period, equal to the excess.

Note:          A notional taxable income is taken into account in working out the company’s taxable income under section 165‑65.

             (4)  If the company has a *notional taxable income for all periods in the income year, this Subdivision has no further application, and the company’s taxable income for the income year is calculated in the usual way.

Note:          The usual way of working out taxable income is set out in section 4‑15.

165‑80  How to calculate the company’s share of a partnership’s notional loss or notional net income for a period if both entities have the same income year

             (1)  This section applies if at any time during a period the company is a partner in a partnership that has an income year that starts and ends when the company’s income year starts and ends.

             (2)  The partnership’s notional loss or notional net income for the period is calculated in the same way as the *notional loss or *notional taxable income of a company.

             (3)  The company’s share is calculated by dividing:

•    the company’s interest in the partnership’s net income or partnership loss of the income year;

by

•    the amount of that net income or partnership loss;

and expressing the result as a percentage.

             (4)  However, if the partnership had neither a net income nor a partnership loss, the company’s share is a percentage that is fair and reasonable having regard to the extent of the company’s interest in the partnership.

165‑85  How to calculate the company’s share of a partnership’s notional loss or notional net income for a period if the entities have different income years

             (1)  This section applies if at any time during a period the company is a partner in a partnership that has an income year that starts and ends at a different time from when the company’s income year starts and ends.

             (2)  So much of the partnership’s net income or partnership loss of an income year as was *derived during the period is a notional net income or notional loss of the partnership for the period. (For the purposes of this subsection, the partnership’s net income or partnership loss is calculated without taking account of the partnership’s *full year deductions for that income year.)

Note:          The partnership’s full year deductions are dealt with in section 165‑90.

             (3)  The company’s share is calculated by dividing:

•    the company’s interest in the partnership’s net income or partnership loss of that income year;

by

•    the amount of that net income or partnership loss;

and expressing the result as a percentage.

165‑90  Company’s full year deductions include a share of partnership’s full year deductions

             (1)  This section applies if at any time during the income year the company is a partner in a partnership that has one or more *full year deductions for the income year of the partnership that corresponds to the income year of the company.

             (2)  The partnership’s *full year deductions are treated as full year deductions of the company, but only to the extent of the *company’s share.

             (3)  If the partnership’s income year is the same as the company’s, the company’s share is calculated by dividing:

•    the company’s interest in the partnership’s net income or partnership loss of the income year;

by

•    the amount of that net income or partnership loss;

and expressing the result as a percentage.

             (4)  However, if the partnership had neither a net income nor a partnership loss, the company’s share is a percentage that is fair and reasonable having regard to the extent of the company’s interest in the partnership.

             (5)  If the partnership’s income year does not start and end at the same time as the company’s income year, the company’s share is a percentage that is fair and reasonable having regard to all relevant circumstances.

Subdivision 165‑CAApplying net capital losses of earlier income years

Guide to Subdivision 165‑CA

165‑93  What this Subdivision is about

In working out its net capital gain for an income year, a company cannot apply a net capital loss for an earlier income year unless:

               (a)     it has the same owners and the same control from the start of the loss year to the end of the income year; or

              (b)     it satisfies the same business test by carrying on the same business, entering into no new kinds of transactions and conducting no new kinds of business.

Table of sections

Operative provisions

165‑96      When a company cannot apply a net capital loss

Operative provisions

165‑96  When a company cannot apply a net capital loss

             (1)  In working out its *net capital gain for the *current year, a company cannot apply a *net capital loss it has for an earlier income year if Subdivision 165‑A would prevent it from deducting the loss for the current year if:

                     (a)  the loss were a *tax loss of the company for that earlier income year; and

                     (b)  section 165‑20 (about deducting part of a tax loss) were disregarded.

Note 1:       A company’s net capital gain for an income year is usually worked out under section 102‑5.

Note 2:       Subdivision 165‑A deals with the deductibility of a company’s tax loss for an earlier income year if there has been a change in the ownership or control of the company in the period from the start of the loss year to the end of the income year.

Note 3:       Subdivision 165‑F may affect the application of Subdivision 165‑A.

             (2)  If subsection (1) prevents the company from applying the *net capital loss, it can apply the part of the loss that it made during a part of that earlier income year, but only if, assuming that part of that income year had been treated as the whole of it, the company would have been entitled to apply the net capital loss.

Subdivision 165‑CBWorking out the net capital gain and the net capital loss for the income year of the change

Guide to Subdivision 165‑CB

165‑99  What this Subdivision is about

A company that has not had the same ownership and control during the income year, and has not satisfied the same business test, works out its net capital gain and net capital loss under this Subdivision.

Table of sections

When a company must work out its net capital gain and net capital loss under this Subdivision

165‑102    On a change of ownership, or of control of voting power, unless the company satisfies the same business test

Working out the company’s net capital gain and net capital loss

165‑105    First, divide the income year into periods

165‑108    Next, calculate the notional net capital gain or notional net capital loss for each period

165‑111    How to work out the company’s net capital gain

165‑114    How to work out the company’s net capital loss

When a company must work out its net capital gain and net capital loss under this Subdivision

165‑102  On a change of ownership, or of control of voting power, unless the company satisfies the same business test

                   A company must calculate its *net capital gain and *net capital loss for the income year under this Subdivision if:

                     (a)  it must calculate its taxable income and *tax loss for the income year under Subdivision 165‑B; or

Note:       Subdivision 165‑F may affect the application of Subdivision 165‑B.

                     (b)  it would be required to calculate them under that Subdivision but for subsection 165‑50(3) (about cases where that Subdivision would make no difference to the taxable income).

Note:          In the case of a widely held or eligible Division 166 company, Subdivision 166‑B modifies how this Subdivision applies, unless the company chooses otherwise.

Working out the company’s net capital gain and net capital loss

165‑105  First, divide the income year into periods

                   Divide the income year into periods according to section 165‑45 (which is about working out the company’s taxable income under Subdivision 165‑B).

165‑108  Next, calculate the notional net capital gain or notional net capital loss for each period

             (1)  The company has a notional net capital gain for a period if the total of the *capital gains it made during the period exceeds the total of the *capital losses it made during the period. The notional net capital gain is the amount of the excess.

             (2)  On the other hand, if the total of those losses exceeds the total of those gains, the company has a notional net capital loss for the period, equal to the excess.

             (3)  If the company has a *notional net capital loss for none of the periods in the income year, this Subdivision has no further application, and the company’s *net capital gain for the income year is calculated in the usual way.

The usual way of working out the net capital gain is set out in section 102‑5.

Trust’s capital gain attributed to company beneficiary

             (4)  If some or all (the attributable amount) of an amount included in the company’s assessable income for the income year under:

                     (a)  section 97 (Beneficiary of a trust estate who is not under a legal disability) of the Income Tax Assessment Act 1936; or

                     (b)  section 98A (Non‑resident beneficiaries assessable in respect of certain income) of that Act;

is attributable to a *capital gain that the trust made at a particular time during the period, this section applies to the attributable amount as if it were a *capital gain made by the company at that time.

165‑111  How to work out the company’s net capital gain

                   The company’s net capital gain for the income year is worked out in this way:

Working out the company’s net capital gain

Step 1.   Add up the *notional net capital gains (if any) worked out under section 165‑108.

                   Note:             A notional net capital loss for a period is not taken into account, but counts towards the company’s net capital loss for the income year.

Step 2.   Add to the Step 1 amount so much of each amount included in the company’s assessable income for the income year under:

               (a)     section 97 (Beneficiary of a trust estate who is not under a legal disability) of the Income Tax Assessment Act 1936; or

              (b)     section 98A (Non‑resident beneficiaries assessable in respect of certain income) of that Act;

              as is attributable to a *capital gain that the trust made outside the income year.

                   Note:             This is relevant only if the trust has an income year that starts and ends at a different time from when the company’s income year starts and ends.

Step 3.   If the Step 2 amount is more than zero, reduce it by applying any unapplied *net capital losses from previous income years. (If this reduces it to zero, the company has no net capital gain for the income year.)

                   Note:             To apply net capital losses: see section 102‑15.

Step 4.   If the Step 3 amount is more than zero, it is the company’s net capital gain.

Note :         For exceptions and modifications to these rules: see section 102‑30.

165‑114  How to work out the company’s net capital loss

                   The company’s net capital loss for the income year is worked out in this way:

Working out the company’s net capital loss

Step 1.   Add up the *notional net capital losses (if any) worked out under section 165‑108.

Step 2.   If the Step 1 amount is more than zero, it is the company’s net capital loss.

Note:          For exceptions and modifications to these rules: see section 102‑30.

Subdivision 165‑CCChange of ownership or control of company that has an unrealised net loss

Guide to Subdivision 165‑CC

165‑115  What this Subdivision is about

If a change occurs in the ownership or control of a company that has an unrealised net loss, the company cannot, to the extent of the unrealised net loss, have capital losses taken into account, or deduct revenue losses, in respect of CGT events that happen to CGT assets that it owned at the time of the change, unless it satisfies the same business test.

165‑115AA  Special rules to save compliance costs

             (1)  A company is exempt from these rules if, at the time of the change in ownership or control, it (together with certain related entities) has a net asset value of not more than $6,000,000 under the test in section 152‑15 (for small business CGT relief).

             (2)  In working out whether it has an unrealised net loss, a company can choose to work out the market value of each of its assets individually, or of all of its assets together.

             (3)  If a company works out the market value of each of its assets individually, it may choose to exclude every asset that it acquired for less than $10,000, in which case:

                     (a)  unrealised losses and gains on the excluded assets will not be taken into account in calculating the company’s unrealised net loss; and

                     (b)  losses on the excluded assets will be allowed without the company being subject to the same business test.

Table of sections

Operative provisions

165‑115A Application of Subdivision

165‑115B  What happens when the company makes a capital loss or becomes entitled to a deduction in respect of a CGT asset after a changeover time

165‑115BAWhat happens when a CGT event happens after a changeover time to a CGT asset of the company that is trading stock

165‑115BBOrder of application of assets: residual unrealised net loss

165‑115C  Changeover time—change in ownership of company

165‑115D Changeover time—change in control of company

165‑115E  What is an unrealised net loss

165‑115F  Notional gains and losses

Operative provisions

165‑115A  Application of Subdivision

Application

             (1)  This Subdivision applies to a company if:

                     (a)  a changeover time has occurred or occurs in relation to the company after the commencement time; and

                     (b)  at the changeover time the company had an unrealised net loss (see section 165‑115E); and

                     (c)  either of the following applies:

                              (i)  the company makes a *capital loss, or apart from this Subdivision would be entitled to a deduction, in respect of a *CGT event that happens to a *CGT asset referred to in subsection (1A);

                             (ii)  the company makes a *trading stock loss in respect of a CGT asset referred to in subsection (1A) that is an item of *trading stock; and

                     (d)  the company would not, at the changeover time, satisfy the maximum net asset value test under section 152‑15.

CGT assets in respect of which Subdivision applies

          (1A)  The *CGT assets for the purposes of paragraph 165‑115A(1)(c) are:

                     (a)  any CGT asset that the company owned at the changeover time; and

                     (b)  any CGT asset that the company did not own at the changeover time but had owned at a previous time, where:

                              (i)  a deferral event referred to in subsection 170‑255(1) happened before the changeover time; and

                             (ii)  the deferral event involved the company as the originating company referred to in that subsection; and

                            (iii)  the deferral event would have resulted in the company making a *capital loss, or becoming entitled to a deduction, in respect of the CGT asset except for section 170‑270; and

                            (iv)  the company is not taken to have made a capital loss at or before the changeover time, or to have become entitled to a deduction at that time, under section 170‑275 in respect of the asset.

Company may choose to disregard CGT assets acquired for less than $10,000

          (1B)  A company may choose, for the purposes of the application of this Subdivision to it in respect of a particular changeover time, that every *CGT asset that has been acquired by it for less than $10,000 is to be disregarded.

                   However, the choice does not affect the application of the *global method of working out whether the company has an unrealised net loss (see subsection 165‑115E(2)).

Time for making choice

          (1C)  A choice under subsection (1B) must be made on or before:

                     (a)  the day on which the company lodges its *income tax return for the income year in which the relevant changeover time occurred; or

                     (b)  such later day as the Commissioner allows.

Trading stock loss

          (1D)  A company is taken to have made a trading stock loss in respect of an asset that is an item of *trading stock if, and only if:

                     (a)  one of the following applies:

                              (i)  the company *disposes of the item;

                             (ii)  the item stops being trading stock (within the meaning of section 70‑80);

                            (iii)  the item is revalued under Division 70; and

                     (b)  if subparagraph (a)(i) or (ii) applies—the item’s *market value at the time when it is disposed of or stops being trading stock is less than:

                              (i)  in respect of an item that has been valued under Division 70—its latest value under the Division; or

                             (ii)  otherwise—its cost at that time; and

                     (c)  if subparagraph (a)(iii) applies—the item’s value under the revaluation is less than:

                              (i)  in respect of an item that has previously been valued under Division 70—its latest value under that Division before the revaluation; or

                             (ii)  otherwise—its cost at the time of the revaluation.

                   The difference worked out under paragraph (b) or (c), as the case may be, constitutes the amount of the *trading stock loss.

Commencement time

             (2)  For the purposes of this Subdivision, the commencement time of a company is:

                     (a)  if the company was in existence at 1 pm (by legal time in the Australian Capital Territory) on 11 November 1999—that time; or

                     (b)  if the company came into existence after that time—the time when it came into existence.

Reference time

          (2A)  For the purposes of the application of this Subdivision to a company in relation to a particular time (the test time), the reference time is:

                     (a)  if no changeover time occurred in respect of the company before the test time—the commencement time; or

                     (b)  otherwise—the time immediately after the last changeover time that occurred in respect of the company before the test time.

Asset owned at more than one changeover time

             (3)  If:

                     (a)  2 or more changeover times have occurred or occur in relation to a company; and

                     (b)  the company owned a particular asset at more than one of those changeover times;

this Subdivision applies to the company in respect of that asset only in relation to the later or latest of those changeover times.

Note:          For changeover time see sections 165‑115C and 165‑115D.

165‑115B  What happens when the company makes a capital loss or becomes entitled to a deduction in respect of a CGT asset after a changeover time

Where capital loss or deduction is equal to or less than residual unrealised net loss

             (1)  If the *capital loss or deduction referred to in subparagraph 165‑115A(1)(c)(i) is equal to or less than the company’s residual unrealised net loss at the time of the occurrence of the event that resulted in the capital loss or entitled the company to the deduction:

                     (a)  the capital loss is taken to have been a *net capital loss; or

                     (b)  the deduction is taken to have been a *tax loss;

of the company for the income year immediately before the income year in which the changeover time occurred.

Where capital loss or deduction is greater than residual unrealised net loss

             (2)  If the *capital loss or deduction referred to in subparagraph 165‑115A(1)(c)(i) is greater than the company’s residual unrealised net loss at the time of the occurrence of the event that resulted in the capital loss or entitled the company to the deduction:

                     (a)  the part of the capital loss that is equal to the residual unrealised net loss is taken to have been a *net capital loss; or

                     (b)  the part of the deduction that is equal to the residual unrealised net loss is taken to have been a *tax loss;

of the company for the income year immediately before the income year in which the changeover time occurred.

Company does not meet certain conditions in relation to net capital loss or tax loss

             (3)  The company is taken not to have met, at the changeover time, the conditions in subsections 165‑12(2), (3) and (4) in relation to the *net capital loss or the *tax loss. The changeover time is the test time for applying section 165‑13 to the company.

Need to meet same business test

             (4)  The effect of subsection (3) is that the company cannot apply the *net capital loss (see section 165‑10 as it applies because of section 165‑96), or deduct the *tax loss (see section 165‑10), unless it meets the condition in section 165‑13 (the same business test).

Consequences for net capital loss

             (5)  The *net capital loss cannot be applied against *capital gains made in an income year before the income year in which the company made the capital loss referred to in subparagraph 165‑115A(1)(c)(i).

Consequences for tax loss

             (6)  The *tax loss cannot be deducted from assessable income *derived in an income year before the income year in which the company would have been entitled to the deduction referred to in subparagraph 165‑115A(1)(c)(i).

Note:          For changeover time see sections 165‑115C and 165‑115D.

165‑115BA  What happens when a CGT event happens after a changeover time to a CGT asset of the company that is trading stock

Application

             (1)  This section applies to the company if, after the changeover time, the company makes a *trading stock loss in respect of an item of *trading stock as mentioned in subparagraph 165‑115A(1)(c)(ii).

Where trading stock loss is equal to or less than residual unrealised net loss

             (2)  If the *trading stock loss is equal to or less than the company’s residual unrealised net loss at the time of the occurrence of the trading stock loss, the amount of the trading stock loss is to be included in the company’s assessable income.

Where trading stock loss is greater than unrealised net loss

             (3)  If the *trading stock loss is greater than the company’s residual unrealised net loss at the time of the occurrence of the trading stock loss, the part of the trading stock loss that is equal to the residual unrealised net loss is to be included in the company’s assessable income.

No increase in assessable income if company satisfies the same business test

             (4)  Neither subsection (2) nor (3) applies to the company if the company meets the condition in section 165‑13 (the same business test).

Assumptions for purposes of same business test

             (5)  In determining whether the company meets the condition in section 165‑13, assume:

                     (a)  that the *trading stock loss (if subsection (2) applies) or the part of the trading stock loss (if subsection (3) applies) is a *net capital loss of the company for the income year immediately before the income year in which the changeover time occurred; and

                     (b)  that the company failed, at the changeover time, to meet the condition in subsections 165‑12(2), (3) and (4) in relation to the net capital loss referred to in paragraph (a); and

                     (c)  that the changeover time is the test time; and

                     (d)  that the same business test period is the income year in which the loss occurred.

165‑115BB  Order of application of assets: residual unrealised net loss

Order in which assets are to be applied

             (1)  In applying subsection 165‑115B(2) or 165‑115BA(3) in respect of assets that the company owned at the changeover time:

                     (a)  the company’s *capital losses are taken to have been made, the company is taken to have become entitled to deductions and the company is taken to have made *trading stock losses in the order in which the events that resulted in the capital losses, deductions or trading stock losses occurred; and

                     (b)  if 2 or more such events occurred at the same time, they are taken to have occurred in such order as the company determines.

Residual unrealised net loss

             (2)  The company’s residual unrealised net loss, at the time of an event (the relevant event) that resulted in the company making a *capital loss, becoming entitled to a deduction or making a *trading stock loss, in respect of an asset, is the amount worked out using the following formula:

where:

previous capital losses, deductions or trading stock losses means the total of the following:

                     (a)  capital losses that the company made, deductions to which the company became entitled, or *trading stock losses that the company made, as a result of events earlier than the relevant event in respect of assets that the company owned at the *changeover time;

                     (b)  each reduction that section 715‑105 (as applying to the company as the *head company of a *consolidated group or *MEC group) makes in respect of such an asset because an entity ceased before the time of the relevant event to be a *subsidiary member of the group (but counting only the greater or greatest such reduction if 2 or more are made for the same asset);

or nil if there are none.

unrealised net loss means the company’s unrealised net loss at the last changeover time that occurred before the relevant event.

Note:          For changeover time see sections 165‑115C and 165‑115D.

165‑115C  Changeover time—change in ownership of company

             (1)  A time (the test time) is a changeover time in respect of a company if:

                     (a)  persons who had *more than 50% of the voting power in the company at the reference time do not have more than 50% of that voting power immediately after the test time; or

                     (b)  persons who had rights to *more than 50% of the company’s dividends at the reference time do not have rights to more than 50% of those dividends immediately after the test time; or

                     (c)  persons who had rights to *more than 50% of the company’s capital distributions at the reference time do not have rights to more than 50% of those distributions immediately after the test time.

Note 1:       See section 165‑150 to work out who had more than 50% of the voting power in the company.

Note 2:       See section 165‑155 to work out who had rights to more than 50% of the company’s dividends.

Note 3:       See section 165‑160 to work out who had rights to more than 50% of the company’s capital distributions.

Note 4:       For reference time see subsection 165‑115A(2A).

Note 5:       Division 167 has special rules for working out rights to voting power, dividends and capital distributions in a company whose shares do not all carry the same rights to those matters.

             (2)  To work out whether paragraph (1)(a), (b) or (c) applied at a particular time, apply the primary test unless subsection (3) requires the alternative test to be applied.

Note:          For the primary test see subsections 165‑150(1), 165‑155(1) and 165‑160(1).

             (3)  Apply the alternative test if one or more other companies beneficially owned *shares or interests in shares in the company at any time during the period from the reference time to the *test time.

Note:          For the alternative test see subsections 165‑150(2), 165‑155(2) and 165‑160(2).

             (4)  A *test time that would, apart from this subsection, be a changeover time in respect of the company because of the application of subsection (1) is taken not to be a changeover time if:

                     (a)  that subsection would not have applied except for the operation of section 165‑165; and

                     (b)  the company has information from which it would be reasonable to conclude that less than 50% of the company’s unrealised net loss at the test time has been reflected in deductions, capital losses, or reduced assessable income, that occurred, or could occur in future, because of the happening of any *CGT event in relation to any *direct equity interests or *indirect equity interests in the company during the period from the reference time to the test time.

          (4A)  If the company is:

                     (a)  a *non‑profit company; or

                     (b)  a *mutual affiliate company; or

                     (c)  a *mutual insurance company;

during the whole of the period from the reference time to the *test time, the test time is taken not to be a *changeover time in respect of the company because of the application of paragraphs (1)(b) and (c).

             (5)  The happening of any *CGT event in relation to a *direct equity interest or *indirect equity interest in the company that results in the time of the happening of the event being a changeover time in respect of the company is taken, for the purposes of paragraph (4)(b), to have occurred during the period referred to in that paragraph.

165‑115D  Changeover time—change in control of company

             (1)  A time (the test time) is also a changeover time in respect of a company if, at the test time:

                     (a)  a person or persons who did not control, and were not able to control, the voting power in the company at the reference time began to control, or became able to control, that voting power immediately after the test time; and

                     (b)  that person or those persons so began, or became able, to control that voting power for the purpose of:

                              (i)  getting some benefit or advantage in relation to how this Act applies; or

                             (ii)  getting such a benefit or advantage for someone else;

                            or for purposes including that purpose.

Note 1:       A person can still control the voting power in a company that is in liquidation etc.: see section 165‑250.

Note 2:       Subdivision 167‑B has special rules for working out voting power in a company whose shares do not all carry the same voting rights, or do not carry all of the voting rights in the company.

             (2)  In this section:

control of the voting power in a company means control of that voting power either directly, or indirectly through one or more interposed entities.

165‑115E  What is an unrealised net loss

             (1)  The question whether a company has an unrealised net loss at a particular time (the relevant time) is worked out in this way (the individual asset method), unless the company chooses to work it out using the *global method (set out in subsection (2)).

Method statement

Step 1.   Work out under section 165‑115F in respect of each *CGT asset that the company owned at the relevant time any notional capital gain or notional revenue gain or any notional capital loss or notional revenue loss that the company has at that time in respect of the asset.

              The sum of the notional capital gains is the company’s unrealised capital gain at the relevant time.

              The sum of the notional capital losses is the company’s unrealised capital loss at the relevant time.

              The sum of the notional revenue gains is the company’s unrealised revenue gain at the relevant time.

              The sum of the notional revenue losses is the company’s unrealised revenue loss at the relevant time.

Step 2.   Add up the unrealised capital gain and the unrealised revenue gain at the relevant time. The total is the unrealised gross gain at that time.

Step 3.   Add up the unrealised capital loss and the unrealised revenue loss at the relevant time. The total is the unrealised gross loss at that time.

Step 4.   If the unrealised gross loss at the relevant time exceeds the unrealised gross gain at that time, the excess is the company’s preliminary unrealised net loss at that time.

Step 5.   Add up the company’s preliminary unrealised net loss and any *capital loss, deduction or share of a deduction disregarded under section 170‑270 in relation to an asset referred to in paragraph 165‑115A(1A)(b). The total is the company’s unrealised net loss at the relevant time.

             (2)  The global method of working out whether the company has an unrealised net loss at the relevant time is as follows:

Method statement

Step 1.   Work out the total *market value of all *CGT assets that the company owned at the relevant time (including those it *acquired for less than $10,000), using a valuation method that would generally be regarded as appropriate in the circumstances.

Step 2.   Work out the total of the *cost bases of those *CGT assets at the relevant time.

                   Note:             If a CGT asset that the company owned at the relevant time was also trading stock or a revenue asset at that time, see subsection (3) of this section.

Step 3.   If the step 2 amount exceeds the step 1 amount, the excess is the company’s preliminary unrealised net loss at the relevant time.

Step 4.   Add up the company’s preliminary unrealised net loss and any *capital loss, deduction or share of a deduction disregarded under section 170‑270 in relation to an asset referred to in paragraph 165‑115A(1A)(b). The total is the company’s unrealised net loss at the relevant time.

             (3)  If:

                     (a)  a *CGT asset that the company owned at the relevant time was also *trading stock or a *revenue asset at that time; and

                     (b)  the asset’s *cost base at the relevant time is less than the amount that would be compared under section 165‑115F with the asset’s *market value in working out a notional revenue gain or notional revenue loss that the company has at the relevant time in respect of the asset;

then, for the purposes of step 2 of the method statement in subsection (2) of this section, the amount that would be so compared is to be taken into account instead of that cost base.

             (4)  A choice to use the *global method must be made on or before:

                     (a)  the day on which the company lodges its *income tax return for the income year in which the relevant time occurred; or

                     (b)  such later day as the Commissioner allows.

165‑115F  Notional gains and losses

             (1)  This section applies for the purpose of calculating whether a company has at a particular time (the relevant time) a notional capital gain, a notional capital loss, a notional revenue gain or a notional revenue loss in respect of a *CGT asset that it owned at that time.

             (2)  The calculation is to be made on the assumption that the company disposed of the asset at its *market value at the relevant time.

             (3)  In relation to an asset other than an item of *trading stock:

                     (a)  if the company would make a *capital gain in respect of the disposal of the asset—the company has at the relevant time in respect of the asset a notional capital gain equal to the amount of the capital gain; or

                     (b)  if an amount (other than a capital gain) would be included in the company’s assessable income in respect of the disposal of the asset—the company has at the relevant time in respect of the asset a notional revenue gain equal to the amount so included; or

                     (c)  if the company would make a *capital loss in respect of the disposal of the asset—the company has at the relevant time in respect of the asset a notional capital loss equal to the amount of the capital loss; or

                     (d)  if the company would be entitled to a deduction in respect of the disposal of the asset—the company has at the relevant time in respect of the asset a notional revenue loss equal to the amount of the deduction.

             (4)  In relation to an asset that is an item of *trading stock:

                     (a)  if the item’s *market value at the relevant time exceeds:

                              (i)  in respect of an item that has been valued under Division 70—the item’s latest valuation under that Division; or

                             (ii)  otherwise—the *cost of the item at the relevant time;

                            the company has at the relevant time in respect of the article a notional revenue gain equal to the excess; or

                     (b)  if the item’s market value at the relevant time is less than:

                              (i)  in respect of an item that has been valued under Division 70—the item’s latest valuation under that Division; or

                             (ii)  otherwise—the *cost of the item at the relevant time;

                            the company has at the relevant time in respect of the article a notional revenue loss equal to the difference.

             (5)  A company may choose that this section is to apply to the company at the relevant time in respect of an asset to which subsection (6) applied at that time as if references to the *market value of the asset were references to its *written down value.

             (6)  This subsection applies to an asset at the relevant time if:

                     (a)  the asset is a *depreciating asset (not a building or structure) for whose decline in value the company has deducted or can deduct an amount; and

                     (b)  the expenditure incurred by the company to *acquire the asset was less than $1,000,000 (the expenditure can include the giving of property: see section 103‑5); and

                     (c)  it would be reasonable for the company to conclude that the *market value of the asset at that time was not less than 80% of its *written down value at that time.

Subdivision 165‑CDReductions after alterations in ownership or control of loss company

Guide to Subdivision 165‑CD

165‑115GA  What this Subdivision is about

This Subdivision prevents multiple recognition of a company’s losses when significant equity and debt interests that entities (not individuals) have in the company are realised.

165‑115GB  When adjustments must be made

             (1)  The operation of this Subdivision is triggered at an alteration time, which is when:

                     (a)  an alteration takes place in the ownership or control of the company; or

                     (b)  a liquidator or administrator of the company declares that shares or financial instruments are worthless (CGT event G3).

             (2)  An alteration time is the trigger for making reductions and other adjustments to the reduced cost base of significant equity and debt interests in the company that are owned by an entity (not an individual) that, alone or with its associates, has a controlling stake in the company and either:

                     (a)  has a *direct equity interest or *indirect equity interest of at least 10% in the company; or

                     (b)  is owed a debt of at least $10,000 by the company or by another entity that has a significant equity or debt interest in the company.

Deductions that relate to such interests held as trading stock or otherwise on revenue account are also reduced.

             (3)  Adjustments may also be made when such an entity’s interests in the company are partly realised within 12 months before an alteration time or if, under an arrangement, such interests are realised partly within that period or at the alteration time and partly at an earlier time.

             (4)  However, entities in which there are no interests in respect of which the company’s losses have been, or can be, duplicated are not affected by this Subdivision.

165‑115GC  How adjustments are calculated

             (1)  Adjustments are based on the overall loss of the company. This comprises its realised losses and unrealised losses on CGT assets.

             (2)  Special rules, directed at saving compliance costs, apply to determine whether unrealised losses have to be counted at an alteration time and, if so, how to work them out.

             (3)  The company may not have to calculate its unrealised losses if the alteration time is not also a changeover time for the purposes of Subdivision 165‑CC (about change of ownership or control of a company that has an unrealised net loss), and the company has no realised losses.

             (4)  The company does not have to count unrealised losses at an alteration time if (together with certain related entities) it has a net asset value of not more than $6,000,000 under the test in section 152‑15 (for small business CGT relief).

             (5)  In working out its unrealised losses on CGT assets, the company can choose to work out the *market value of each of its assets individually, or of all of its assets together.

             (6)  If the company works out the *market value of each of its assets individually, unrealised losses on assets acquired for less than $10,000 do not have to be calculated at any time.

             (7)  Amounts (whether realised or unrealised) counted at a previous alteration time are not counted again at a later alteration time. (This does not apply to unrealised losses worked out by reference to the *market value of all the company’s assets together.)

             (8)  However, if unrealised amounts are not counted at a previous alteration time (for example, because of the $10,000 exclusion, or because you satisfy the maximum net asset value test in section 152‑15) and are not required to be taken into account in adjustments made at that time, they may be counted at a later time as part of a realised loss.

             (9)  A formula is provided for making adjustments in straightforward cases if applying the formula gives a reasonable result having regard to the object of the Subdivision. Otherwise, reasonable adjustments must be made having regard to a number of stated factors.

           (10)  To help entities to make the adjustments, any entity that, in its own right, has a controlling stake in the company is required to provide a written notice to its associates setting out relevant information. In limited circumstances, the company itself may have to provide a written notice to entities that, to its knowledge, have a significant equity or debt interest in it.

165‑115H  How this Subdivision applies

             (1)  This Subdivision provides for certain taxation consequences for an entity (not an individual) that had a significant equity or debt interest in a loss company immediately before an alteration time occurred in respect of the company.

             (2)  The following flowchart explains how to work out whether this Subdivision applies to an entity.

 

             (3)  If this Subdivision applies to an entity, reductions are made to:

                     (a)  the reduced cost base of the entity’s equity or debt (see subsection 165‑115ZA(3)); or

                     (b)  any deduction to which the entity is entitled in respect of the disposal of the equity or debt (see subsection 165‑115ZA(4)); or

                     (c)  deductions in respect of, and the cost of, any of the equity or debt that is trading stock (see subsection 165‑115ZA(5)).

Example:    The following is an example of how this Subdivision operates:

Facts:         Alpha Co acquired 80% of the shares in Beta Co on 5 May 1998 for $1,000.

                   Gamma Co owns 20% of the shares in Beta Co.

                   On 6 February 2000, Alpha Co disposed of its shares for $600.

                   At the beginning of the 1999‑2000 income year, Beta Co had an unapplied net capital loss of $500 from the 1998‑99 income year. This loss was fully reflected in the market value of shares in Beta Co.

                   Alpha Co and Gamma Co are not associated in any way.

Result:       

Step 1:        An alteration time occurred in respect of Beta Co as a result of the change in ownership that occurred when Alpha Co sold its shares.

Step 2:        Beta Co was a loss company at the alteration time because it had an unapplied net capital loss from an earlier income year.

Step 3:        Alpha Co had a relevant equity interest in Beta Co immediately before the alteration time because it had a controlling stake and significant interest (80% equity interest). Gamma Co did not have a relevant equity interest in Beta Co because it did not have a controlling stake.

Step 4:        Because Alpha Co had a relevant equity interest in Beta Co, the reduced cost bases of its shares in Beta Co are reduced by 80% of Beta Co’s net capital loss:

                   Alpha Co does not make a capital gain on the disposal of its shares in Beta Co because the capital proceeds ($600) are less than the cost bases ($1,000).

                   Nor did Alpha Co make a capital loss on the disposal of its shares in Beta Co because the capital proceeds ($600) are not less than the reduced cost bases as further reduced by this Subdivision ($600).

                   The net capital loss in Beta Co is not duplicated on the sale of Alpha Co’s shares in Beta Co.

Step 5.        There are no notice requirements in this simple case. If Gamma Co and Alpha Co were associates (so that Gamma Co had a relevant equity interest in Beta Co), Alpha Co would need to provide the following information to Gamma Co:

(a)    the alteration time: 6 February 2000;

(b)    Beta Co’s overall loss at the alteration time: $500;

(c)    details of the overall loss: a net capital loss of $500 for the 1998‑99 income year.

Table of sections

Operative provisions

165‑115J   Object of Subdivision

165‑115K  Application and interpretation

165‑115L  Alteration time—alteration in ownership of company

165‑115M Alteration time—alteration in control of company

165‑115N Alteration time—declaration by liquidator or administrator

165‑115P  Notional alteration time—disposal of interests in company within 12 months before alteration time

165‑115Q Notional alteration time—disposal of interests in company earlier than 12 months before alteration time

165‑115R  When company is a loss company at first or only alteration time in income year

165‑115S  When company is a loss company at second or later alteration time in income year

165‑115T  Reduction of certain amounts included in company’s overall loss at alteration time

165‑115U Adjusted unrealised loss

165‑115V Notional losses

165‑115W Calculation of trading stock decrease

165‑115X Relevant equity interest

165‑115Y Relevant debt interest

165‑115Z  What constitutes a controlling stake in a company

165‑115ZAReductions and other consequences if entity has relevant equity interest or relevant debt interest in loss company immediately before alteration time

165‑115ZBAdjustment amounts for the purposes of section 165‑115ZA

165‑115ZCNotices to be given

165‑115ZDAdjustment (or further adjustment) for interest realised at a loss after global method has been used

Operative provisions

165‑115J  Object of Subdivision

                   The main object of this Subdivision is to make appropriate adjustments (under section 165‑115ZA) to the tax values of significant equity and debt interests held directly or indirectly by entities other than individuals in a *loss company whose ownership or control alters.
The purpose of the adjustments is to prevent the duplication of the company’s realised and unrealised losses when any of those interests are
*disposed of or otherwise realised. This happens because the company’s losses are reflected in the values of the interests.

165‑115K  Application and interpretation

Application

             (1)  This Subdivision applies if:

                     (a)  an alteration time occurs in respect of a company; and

                     (b)  the company is a *loss company at the alteration time; and

                     (c)  one or more entities had relevant equity interests or relevant debt interests in the company immediately before the alteration time.

Note 1:       For alteration time, see sections 165‑115L, 165‑115M, 165‑115N, 165‑115P and 165‑115Q.

Note 2:       For relevant equity interests and relevant debt interests, see sections 165‑115X and 165‑115Y.

Alteration time before commencement time to be disregarded

             (2)  An alteration time does not include a time before the commencement time.

Commencement time

             (3)  The commencement time for a company is:

                     (a)  if the company was in existence at 1 pm (by legal time in the Australian Capital Territory) on 11 November 1999—that time; or

                     (b)  if the company came into existence after that time—the time when it came into existence.

Certain alteration times to be disregarded

             (4)  If:

                     (a)  a time (the test time) would, apart from this subsection, be an alteration time in relation to a company; and

                     (b)  the company does not have any losses of the kinds referred to in paragraphs 165‑115R(3)(a), (b), (c) and (d) and 165‑115S(3)(a) and (b); and

                     (c)  the test time is not a changeover time in relation to the company under Subdivision 165‑CC; and

                     (d)  if the test time were such a changeover time, it would be reasonable for the company to conclude that it would not have an unrealised net loss at that time under section 165‑115E;

the test time is taken not to be an alteration time in relation to the company.

Application to CGT events other than disposals

             (5)  This Subdivision applies to a *CGT event (other than a *disposal) happening in relation to a CGT asset (for example, an interest in a company that is constituted by an equity or debt):

                     (a)  in the same way as it applies to a disposal of a CGT asset; and

                     (b)  as if the asset had been disposed of at the time when the CGT event happens.

165‑115L  Alteration time—alteration in ownership of company

             (1)  A time (the test time) is an alteration time in respect of a company if:

                     (a)  persons who had *more than 50% of the voting power in the company at the reference time do not have more than 50% of that voting power immediately after the test time; or

                     (b)  persons who had rights to *more than 50% of the company’s dividends at the reference time do not have rights to more than 50% of those dividends immediately after the test time; or

                     (c)  persons who had rights to *more than 50% of the company’s capital distributions at the reference time do not have rights to more than 50% of those distributions immediately after the test time.

Note 1:       See section 165‑150 to work out who had more than 50% of the voting power in the company.

Note 2:       See section 165‑155 to work out who had rights to more than 50% of the company’s dividends.

Note 3:       See section 165‑160 to work out who had rights to more than 50% of the company’s capital distributions.

Note 4:       Division 167 has special rules for working out rights to voting power, dividends and capital distributions in a company whose shares do not all carry the same rights to those matters.

             (2)  The reference time is:

                     (a)  if no alteration time occurred in respect of the company before the *test time—the commencement time; or

                     (b)  otherwise—the time immediately after the last alteration time.

             (3)  To work out whether paragraph (1)(a), (b) or (c) applied at a particular time, apply the primary test unless subsection (4) requires the alternative test to be applied.

Note:          For the primary test see subsections 165‑150(1), 165‑155(1) and 165‑160(1).

             (4)  Apply the alternative test if one or more other companies beneficially owned *shares or interests in shares in the company at any time during the period from the reference time to the *test time.

Note:          For the alternative test see subsections 165‑150(2), 165‑155(2) and 165‑160(2).

             (5)  If the company is:

                     (a)  a *non‑profit company; or

                     (b)  a *mutual affiliate company; or

                     (c)  a *mutual insurance company;

during the whole of the period from the reference time to the *test time, the test time is taken not to be an *alteration time in respect of the company because of the application of paragraphs (1)(b) and (c).

165‑115M  Alteration time—alteration in control of company

             (1)  A time (the test time) is also an alteration time in respect of a company if, at the test time:

                     (a)  a person or persons who did not control, and were not able to control, the voting power in the company at the reference time began to control, or became able to control, that voting power immediately after the test time; and

                     (b)  that person or those persons so began, or became able, to control that voting power for the purpose of:

                              (i)  getting some benefit or advantage in relation to how this Act applies; or

                             (ii)  getting such a benefit or advantage for someone else;

                            or for purposes including that purpose.

Note 1:       A person can still control the voting power in a company that is in liquidation etc.: see section 165‑250.

Note 2:       Subdivision 167‑B has special rules for working out voting power in a company whose shares do not all carry the same voting rights, or do not carry all of the voting rights in the company.

             (2)  The reference time is:

                     (a)  if no alteration time occurred in respect of the company before the *test time—the commencement time; or

                     (b)  otherwise—the time immediately after the last alteration time.

             (3)  In this section:

control of the voting power in a company means control of that voting power either directly, or indirectly through one or more interposed entities.

165‑115N  Alteration time—declaration by liquidator or administrator

                   If a liquidator or administrator makes a declaration referred to in section 104‑145 in relation to a company, the time of the declaration is also an alteration time in respect of the company.

165‑115P  Notional alteration time—disposal of interests in company within 12 months before alteration time

             (1)  This section applies if:

                     (a)  an alteration time occurs in respect of a *loss company; and

                     (b)  an entity *disposed of an interest in the company (an equity) or a debt (a debt) at a time (the disposal time) within 12 months before the alteration time but not earlier than the commencement time; and

                     (c)  immediately before the disposal time, the entity had a relevant equity interest or a relevant debt interest in the company that included the equity or debt, or would have had such an interest if any previous disposals of interests or debts by the entity had not occurred; and

                     (d)  immediately before the alteration time, the entity had a relevant equity interest or a relevant debt interest in the company, or would have had such an interest if any previous disposals of interests or debts by the entity had not occurred.

             (2)  The references in paragraphs (1)(c) and (d) to previous *disposals of interests or debts by the entity are references to:

                     (a)  previous disposals within the period referred to in paragraph (1)(b); and

                     (b)  previous disposals before that period if those previous disposals and any one or more of the following:

                              (i)  the disposal of the equity or debt;

                             (ii)  a disposal referred to in paragraph (a);

                            (iii)  a disposal at the alteration time;

                            occurred as part of an *arrangement.

             (3)  The time immediately before the *disposal of the equity or debt is taken to have been an alteration time (a notional alteration time) in respect of the company.

             (4)  The entity:

                     (a)  is taken to have had, immediately before the notional alteration time, a relevant equity interest in the company constituted by the equity or a relevant debt interest in the company constituted by the debt, as the case may be; and

                     (b)  is taken not to have had, immediately before the notional alteration time, any other relevant equity interest or relevant debt interest in the company.

             (5)  No entity (other than the entity referred to in paragraph (1)(b)) is taken to have had a relevant equity interest or a relevant debt interest in the company immediately before the notional alteration time.

             (6)  In applying this Subdivision in relation to the company in respect of a time after a notional alteration time, the notional alteration time is taken not to have occurred.

Note:          For relevant equity interests and relevant debt interests, see sections 165‑115X and 165‑115Y.

165‑115Q  Notional alteration time—disposal of interests in company earlier than 12 months before alteration time

             (1)  This section applies if:

                     (a)  an alteration time occurs in respect of a *loss company; and

                     (b)  an entity that *disposed of an interest in the company (the later equity) or a debt (the later debt) at, or within 12 months before, the alteration time also disposed of an interest in the company (the earlier equity) or a debt (the earlier debt) at a time (the earlier disposal time) earlier than 12 months before the alteration time but not earlier than the commencement time; and

                     (c)  the disposal of the later equity or later debt and the disposal of the earlier equity or earlier debt occurred as part of an *arrangement; and

                     (d)  immediately before the earlier disposal time, the entity had a relevant equity interest or a relevant debt interest in the company that included the earlier equity or earlier debt, or would have had such an interest if any previous disposals of interests or debts by the entity had not occurred; and

                     (e)  immediately before the alteration time, the entity had a relevant equity interest or a relevant debt interest in the company, or would have had such an interest if any previous disposals of interests or debts by the entity had not occurred.

             (2)  The references in paragraphs (1)(d) and (e) to previous *disposals of interests or debts by the entity are references to:

                     (a)  previous disposals within the period referred to in paragraph (1)(b); and

                     (b)  previous disposals before that period if those previous disposals and any one or more of the following:

                              (i)  the disposal of the equity or debt;

                             (ii)  a disposal referred to in paragraph (a);

                            (iii)  a disposal at the alteration time;

                            occurred as part of an *arrangement.

             (3)  The time immediately before the *disposal of the earlier equity or earlier debt is taken to have been an alteration time (a notional alteration time) in respect of the company.

             (4)  The entity:

                     (a)  is taken to have had, immediately before the notional alteration time, a relevant equity interest in the company constituted by the earlier equity or a relevant debt interest in the company constituted by the earlier debt, as the case may be; and

                     (b)  is taken not to have had, immediately before the notional alteration time, any other relevant equity interest or relevant debt interest in the company.

             (5)  No entity (other than the entity referred to in paragraph (1)(b)) is taken to have had a relevant equity interest or a relevant debt interest in the company immediately before the notional alteration time.

             (6)  In applying this Subdivision in relation to the company in respect of a time after a notional alteration time, the notional alteration time is taken not to have occurred.

Note:          For relevant equity interests and relevant debt interests, see sections 165‑115X and 165‑115Y.

165‑115R  When company is a loss company at first or only alteration time in income year

Application

             (1)  The question whether a company is a loss company at the first or only alteration time in a particular income year is to be worked out in this way.

Assumed income year

             (2)  Assume that the period that started at the beginning of the income year and ended at the alteration time is an income year and apply paragraphs (3)(a), (b), (c) and (d) on that assumption.

What is a loss company

             (3)  The company is a loss company at the alteration time if:

                     (a)  at the beginning of the income year it had a *tax loss or tax losses for an earlier income year or earlier income years; or

                     (b)  at the beginning of the income year it had a *net capital loss or net capital losses for an earlier income year or earlier income years; or

                     (c)  it has a tax loss for the income year, calculated as if the income year were a period for the purposes of Subdivision 165‑B; or

                     (d)  it has a net capital loss for the income year, calculated as if the income year were a period for the purposes of Subdivision 165‑CB; or

                     (e)  it has an adjusted unrealised loss at the alteration time.

Note:          For adjusted unrealised loss, see section 165‑115U.

How losses are to be calculated

             (4)  In applying subsection (3):

                     (a)  a *tax loss or *net capital loss that was taken into account in working out under this section whether the company was a *loss company at an alteration time in a previous income year is to be disregarded; and

                     (b)  Subdivision 170‑D is to be disregarded.

Overall loss

             (5)  The sum of:

                     (a)  the amount or amounts of any *tax loss or tax losses referred to in paragraph (3)(a); and

                     (b)  the amount or amounts of any *net capital loss or net capital losses referred to in paragraph (3)(b); and

                     (c)  the amount of any tax loss referred to in paragraph (3)(c); and

                     (d)  the amount of any net capital loss referred to in paragraph (3)(d); and

                     (e)  the amount of any adjusted unrealised loss referred to in paragraph (3)(e);

is the *loss company’s overall loss at the alteration time.

Note:          The loss company’s overall loss is relevant for the purposes of subsections 165‑115ZB(3) and (6).

Certain losses to be disregarded

             (6)  A reference in a paragraph of subsection (3) and in the corresponding paragraph of subsection (5) to a particular loss is a reference only to a loss to the extent to which it represents an outlay or loss of any of the economic resources of the company.

Note:          Where the income tax law allows, as all or part of a loss, an amount for the decline in value of a depreciating asset that exceeds the actual economic depreciation or depletion of the asset concerned, the excess is not to be regarded for the purposes of this subsection as representing an outlay or loss of economic resources of the company.

          (6A)  Subsection (6) does not apply to paragraphs (3)(e) and (5)(e) if the company has chosen to use the *global method of working out whether it has an adjusted unrealised loss at the alteration time.

Amounts of losses may be reduced

             (7)  The amounts referred to in paragraphs (5)(a) to (d) may be reduced under section 165‑115T.

165‑115S  When company is a loss company at second or later alteration time in income year

Application

             (1)  The question whether a company is a loss company at an alteration time (the current alteration time) that is the second or a later alteration time in the same income year is to be worked out in this way.

Assumed income year

             (2)  Assume that the period that started immediately after the last alteration time and ended at the current alteration time is an income year and apply paragraphs (3)(a) and (b) on that assumption.

What is a loss company

             (3)  The company is a loss company at the current alteration time if:

                     (a)  it has a *tax loss for the income year, calculated as if the income year were a period for the purposes of Subdivision 165‑B; or

                     (b)  it has a *net capital loss for the income year, calculated as if the income year were a period for the purposes of Subdivision 165‑CB; or

                     (c)  it has an adjusted unrealised loss at the current alteration time.

Note:          For adjusted unrealised loss, see section 165‑115U.

How losses are to be calculated

             (4)  In applying subsection (3), Subdivision 170‑D is to be disregarded.

Overall loss

             (5)  The sum of:

                     (a)  the amount of any *tax loss referred to in paragraph (3)(a); and

                     (b)  the amount of any *net capital loss referred to in paragraph (3)(b); and

                     (c)  the amount of any adjusted unrealised loss referred to in paragraph (3)(c);

is the *loss company’s overall loss at the current alteration time.

Note:          The loss company’s overall loss is relevant for the purposes of subsections 165‑115ZB(3) and (6).

Certain losses to be disregarded

             (6)  A reference in a paragraph of subsection (3) and in the corresponding paragraph of subsection (5) to a particular loss is a reference only to a loss to the extent to which it represents an outlay or loss of any of the economic resources of the company.

Note:          Where the income tax law allows, as all or part of a loss, an amount for the decline in value of a depreciating asset that exceeds the actual economic depreciation or depletion of the asset concerned, the excess is not to be regarded for the purposes of this subsection as representing an outlay or loss of economic resources of the company.

          (6A)  Subsection (6) does not apply to paragraphs (3)(c) and (5)(c) if the company has chosen to use the *global method of working out whether it has an adjusted unrealised loss at the current alteration time.

Amounts of losses may be reduced

             (7)  The amounts referred to in paragraphs (5)(a) and (b) may be reduced under section 165‑115T.

165‑115T  Reduction of certain amounts included in company’s overall loss at alteration time

             (1)  In working out under section 165‑115R or 165‑115S whether a company was a *loss company at an alteration time (the current alteration time), if a loss (the realised loss) referred to in paragraph 165‑115R(3)(a), (b), (c) or (d) or 165‑115S(3)(a) or (b) that the company had at the current alteration time reflected an amount of a notional revenue loss, a trading stock decrease or a notional capital loss included in an adjusted unrealised loss, that the company had at a previous alteration time, the realised loss is taken to be reduced by that amount.

Note 1:       For notional revenue loss and notional capital loss see section 165‑115V.

Note 2:       For trading stock decrease see section 165‑115W.

             (2)  Subsection (1) does not apply to an adjusted unrealised loss that the company had at a previous alteration time if the company has chosen to use the *global method of working out whether it has an adjusted unrealised loss at that previous time.

165‑115U  Adjusted unrealised loss

             (1)  The question whether a company has an adjusted unrealised loss at an alteration time (the relevant alteration time) is worked out in this way (the individual asset method), unless the company chooses to work it out using the *global method (set out in subsection (1B)).

Method statement

Step 1.   Work out under section 165‑115V or 165‑115W in respect of each *CGT asset that the company owned at the relevant alteration time any notional capital loss, notional revenue loss or trading stock decrease that the company has at that time in respect of the asset.

              To the extent that a notional capital loss or a notional revenue loss in respect of an asset at the relevant alteration time reflected an amount that was counted at an earlier alteration time, do not count it again at the relevant alteration time.

Step 2.   Add up the notional capital losses and the notional revenue losses that the company had at the relevant alteration time. The total is the company’s nominal unrealised loss at that time.

Step 3.   Add up the trading stock decreases that the company had at the relevant alteration time. The total is the company’s overall trading stock decrease at that time.

Step 4.   The sum of the company’s nominal unrealised loss and overall trading stock decrease at the relevant time is the company’s adjusted unrealised loss at that time.

Note:          Certain alteration times are disregarded (see subsections 165‑115K(2) and (4)).

          (1A)  Step 1 in the method statement in subsection (1) does not apply to an amount that was counted at an earlier alteration time if the company has chosen to use the *global method of working out whether it has an adjusted unrealised loss at that earlier time.

          (1B)  The global method of working out whether the company has an adjusted unrealised loss at the relevant alteration time is as follows:

Method statement

Step 1.   Work out the total *market value of all *CGT assets that the company owned at the relevant alteration time (including those it *acquired for less than $10,000), using a valuation method that would generally be regarded as appropriate in the circumstances.

Step 2.   Work out the total of the *cost bases of those *CGT assets at the relevant time.

                   Note:             If a CGT asset that the company owned at the relevant time was also trading stock or a revenue asset at that time, see subsection (1C) of this section.

Step 3.   If the step 2 amount exceeds the step 1 amount, the excess is the company’s adjusted unrealised loss at the relevant time.

          (1C)  If:

                     (a)  a *CGT asset that the company owned at the relevant alteration time was also *trading stock or a *revenue asset at that time; and

                     (b)  the asset’s *cost base at the relevant alteration time is less than the amount that, if the relevant alteration time were a changeover time, would be compared under section 165‑115F with the asset’s *market value in working out a notional revenue gain or notional revenue loss that the company would have at the changeover time in respect of the asset;

then, for the purposes of step 2 of the method statement in subsection (1B) of this section, the amount that would be so compared is to be taken into account instead of that cost base.

          (1D)  A choice to use the *global method must be made on or before:

                     (a)  the day on which the company lodges its *income tax return for the income year in which the relevant alteration time occurred; or

                     (b)  such later day as the Commissioner allows.

             (2)  However, the company does not have an adjusted unrealised loss at the relevant alteration time if the company would, at that time, satisfy the maximum net asset value test under section 152‑15.

165‑115V  Notional losses

             (1)  This section applies for the purpose of calculating whether a company has at an alteration time a notional capital loss or a notional revenue loss in respect of a *CGT asset that it owned at that time.

             (2)  However, a company does not have a notional capital loss or a notional revenue loss at an alteration time in respect of a CGT asset that it *acquired for less than $10,000.

             (3)  The calculation is to be made on the assumption that the company disposed of the asset at its *market value at the alteration time.

             (4)  If the company would make a *capital loss in respect of the disposal of the asset, the company has at the alteration time in respect of the asset a notional capital loss equal to the amount of the capital loss.

             (5)  If the company would be entitled to a deduction in respect of the disposal of the asset, the company has at the alteration time in respect of the asset a notional revenue loss equal to the amount of the deduction.

             (6)  A company may choose that this section is to apply to the company at the alteration time in respect of an asset to which subsection (7) applied at that time as if the reference in subsection (3) to the *market value of the asset were a reference to its *written down value.

             (7)  This subsection applies to an asset at the alteration time if:

                     (a)  the asset is a *depreciating asset (not a building or structure) for whose decline in value the company has deducted or can deduct an amount; and

                     (b)  the expenditure incurred by the company to *acquire the asset was less than $1,000,000 (the expenditure can include the giving of property: see section 103‑5); and

                     (c)  it would be reasonable for the company to conclude that the *market value of the asset at the alteration time was not less than 80% of its *written down value at that time.

165‑115W  Calculation of trading stock decrease

             (1)  The question whether there is a trading stock decrease in relation to a company at an alteration time for a *CGT asset of the company that was an item of *trading stock at that time is worked out in this way.

Method statement

Step 1.   Work out whether the item’s *market value immediately before the alteration time was less than:

               (a)     if there was no earlier alteration time in the income year in which that alteration time occurred—the item’s value under subsection 70‑40(1) at the start of that income year or its cost if subsection 70‑40(2) applies; or

              (b)     if there was an earlier alteration time or there were earlier alteration times in that income year—the item’s market value immediately before that earlier alteration time or the later or latest of those earlier alteration times, as the case may be, or its cost if the company did not own it at that time.

Step 2.   If the item’s *market value immediately before the alteration time was less than:

               (a)     the item’s value or cost referred to in paragraph (a) in step 1; or

              (b)     its market value or cost (as applicable) in paragraph (b) in step 1;

              as the case requires, the difference is the trading stock decrease for the item.

              To the extent (if any) to which the difference reflects an amount counted at an earlier alteration time, do not count that amount again.

Note:          Certain alteration times are disregarded (see subsections 165‑115K(2) and (4)).

          (1A)  Step 2 in the method statement in subsection (1) does not apply to an amount counted at an earlier alteration time if the company has chosen to use the *global method of working out whether it has an adjusted unrealised loss at that earlier time.

             (2)  However, a company does not have a trading stock decrease at an alteration time in respect of an item of *trading stock that it *acquired for less than $10,000.

165‑115X  Relevant equity interest

             (1)  An entity (not an individual) has a relevant equity interest in a *loss company at a particular time if:

                     (a)  at that time the entity has a controlling stake in the loss company (see section 165‑115Z); and

                     (b)  at that time the entity has an interest (an equity) that gives, or interests (each of which is also called an equity) that between them give, the entity:

                              (i)  the control of, or the ability to control, 10% or more of the voting power in the loss company (either directly, or indirectly through one or more interposed entities); or

                             (ii)  the right to receive (either directly, or indirectly through one or more interposed entities) 10% or more of any dividends that the loss company may pay; or

                            (iii)  the right to receive (either directly, or indirectly through one or more interposed entities) 10% or more of any distribution of capital of the loss company; and

                     (c)  the equity or each equity is either:

                              (i)  an interest (including a *share or shares, or an option or right to acquire a share or shares) in the loss company; or

                             (ii)  an interest (including an option or right to acquire an interest) held by the entity directly in another entity that has a relevant equity interest or relevant debt interest in the loss company.

Note:          For paragraph (b), Division 167 has special rules for working out rights to voting power, dividends and capital distributions in a company whose shares do not all carry the same rights to those matters.

             (2)  The equity or equities constitute the entity’s relevant equity interest in the *loss company.

          (2A)  A *widely held company that, apart from this subsection, would have a relevant equity interest in a *loss company at a particular time does not have such an interest at that time.

          (2B)  Subsection (2A) does not apply if:

                     (a)  an entity has a controlling stake in the loss company (see section 165‑115Z); and

                     (b)  that entity has a direct or indirect interest in, or is owed a debt by, the *widely held company, being an interest or debt in respect of which:

                              (i)  the entity could, if a *CGT event happened in respect of the interest or debt, make a *capital loss (other than a capital loss that would be disregarded) that reflects any part of the loss company’s overall loss; or

                             (ii)  the entity has deducted or can deduct, or could deduct at a later time, an amount in respect of the cost of the *acquisition, or a net loss on the *disposal, of the interest or debt, where the deduction reflected or would have reflected, or would reflect, as the case may be, any part of the company’s overall loss.

          (2C)  Subsection (2A) does not apply in respect of a particular time if an entity that had a direct or indirect interest in, or was owed a debt by, the *widely held company at an earlier time, and had a controlling stake in the loss company (see section 165‑115Z) at the earlier time:

                     (a)  made a capital loss (other than a capital loss that was disregarded) because a *CGT event happened in respect of the interest or debt, where the capital loss reflected any part of the *loss company’s overall loss; or

                     (b)  has deducted or could have deducted at an earlier time, or could deduct at a later time, an amount in respect of the cost of the *acquisition, or a net loss on the *disposal, of the interest or debt, where the deduction reflected or would have reflected, or would reflect, as the case may be, any part of the company’s overall loss.

             (3)  An entity (the first entity) that, apart from this subsection, would have a relevant equity interest in a *loss company at a particular time does not have such an interest if, at that time, there is no other entity that has a direct or indirect interest in, or is owed a debt by, the first entity, being an interest or debt in respect of which:

                     (a)  the other entity could, if a *CGT event happened in respect of the interest or debt, make a *capital loss (other than a capital loss that would be disregarded) that reflects any part of the loss company’s overall loss; or

                     (b)  the other entity has deducted or can deduct, or could deduct at a later time:

                              (i)  an amount in respect of the cost of the *acquisition of the interest or debt; or

                             (ii)  a net loss on the *disposal of the interest or debt;

                            where the deduction reflected, or would reflect, any part of the loss company’s overall loss.

          (3A)  Subsection (3) does not apply if the first entity is a *widely held company.

             (4)  Subsection (3) does not apply to the first entity in respect of a particular time if an entity that had a direct or indirect interest in, or was owed a debt by, the first entity at an earlier time:

                     (a)  made a capital loss (other than a capital loss that was disregarded) because a *CGT event happened in respect of the interest or debt, where the capital loss reflected any part of the *loss company’s overall loss; or

                     (b)  has deducted or could have deducted at an earlier time, or could deduct at a later time, an amount in respect of the cost of the *acquisition, or a net loss on the *disposal, of the interest or debt, where the deduction reflected or would have reflected, or would reflect, as the case may be, any part of the company’s overall loss.

             (5)  An individual is not taken to have a relevant equity interest in a *loss company at any time.

             (6)  A partnership that consists only of individuals is not taken to have a relevant equity interest in a *loss company at any time.

             (7)  If section 106‑30, 106‑50 or 106‑60 would treat an act referred to in that section that is done in relation to an interest as having been done by an individual, the interest is not a relevant equity interest.

165‑115Y  Relevant debt interest

             (1)  An entity (not an individual) has a relevant debt interest in a *loss company at a particular time if, at that time:

                     (a)  the entity has a controlling stake in the loss company (see section 165‑115Z); and

                     (b)  the entity is owed by the loss company a debt of not less than $10,000 (a debt) or debts at least one of which is not less than $10,000 (each debt of not less than $10,000 is also called a debt).

             (2)  An entity (not an individual) also has a relevant debt interest in a *loss company at a particular time if, at that time:

                     (a)  the entity has a controlling stake in the loss company; and

                     (b)  the entity is owed by an entity (the debtor entity) other than the loss company a debt of not less than $10,000 (also a debt) or debts at least one of which is not less than $10,000 (each debt of not less than $10,000 is also called a debt); and

                     (c)  the debtor entity has a relevant equity interest or a relevant debt interest in the loss company.

             (3)  The total of the debts referred to in subsections (1) and (2) constitutes the entity’s relevant debt interest in the *loss company.

          (3A)  A *widely held company that, apart from this subsection, would have a relevant debt interest in a *loss company at a particular time does not have such an interest at that time.

          (3B)  Subsection (3A) does not apply if:

                     (a)  an entity has a controlling stake in the loss company (see section 165‑115Z); and

                     (b)  that entity has a direct or indirect interest in, or is owed a debt by, the *widely held company, being an interest or debt in respect of which:

                              (i)  the entity could, if a *CGT event happened in respect of the interest or debt, make a *capital loss (other than a capital loss that would be disregarded) that reflects any part of the loss company’s overall loss; or

                             (ii)  the entity has deducted or can deduct, or could deduct at a later time, an amount in respect of the cost of the *acquisition, or a net loss on the *disposal, of the interest or debt, where the deduction reflected or would have reflected, or would reflect, as the case may be, any part of the company’s overall loss.

          (3C)  Subsection (3A) does not apply in respect of a particular time if an entity that had a direct or indirect interest in, or was owed a debt by, the *widely held company at an earlier time, and had a controlling stake in the *loss company (see section 165‑115Z) at the earlier time:

                     (a)  made a *capital loss (other than a capital loss that was disregarded) because a *CGT event happened in respect of the interest or debt, where the capital loss reflected any part of the loss company’s overall loss; or

                     (b)  has deducted or could have deducted at an earlier time, or could deduct at a later time, an amount in respect of the cost of the *acquisition, or a net loss on the *disposal, of the interest or debt, where the deduction reflected or would have reflected, or would reflect, as the case may be, any part of the company’s overall loss.

             (4)  An entity (the first entity) that, apart from this subsection, would have a relevant debt interest in a *loss company at a particular time does not have such an interest if, at that time, there is no other entity that has a direct or indirect interest in, or is owed a debt by, the first entity, being an interest or debt in respect of which:

                     (a)  the other entity could, if a *CGT event happened in respect of the interest or debt, make a *capital loss (other than a capital loss that would be disregarded) that reflects any part of the loss company’s overall loss; or

                     (b)  the other entity could deduct, or can deduct or could deduct at a later time:

                              (i)  an amount in respect of the cost of the *acquisition of the interest or debt; or

                             (ii)  a net loss on the *disposal of the interest or debt;

                            where the deduction reflects, or would have reflected, any part of the loss company’s overall loss.

          (4A)  Subsection (4) does not apply if the first entity is a *widely held company.

             (5)  Subsection (4) does not apply to the first entity in respect of a particular time if an entity that had a direct or indirect interest in, or was owed a debt by, the first entity at an earlier time:

                     (a)  made a capital loss (other than a capital loss that would be disregarded) at an earlier time because a *CGT event happened in respect of the interest or debt, where the capital loss reflected any part of the *loss company’s overall loss; or

                     (b)  has deducted or could have deducted at an earlier time, or could deduct at a later time, an amount in respect of the cost of the *acquisition, or a net loss on the *disposal, of the interest or debt, where the deduction reflected or would have reflected, or would reflect, as the case may be, any part of the company’s overall loss.

             (6)  An individual is not taken to have a relevant debt interest in a *loss company at any time.

             (7)  A partnership that consists only of individuals is not taken to have a relevant debt interest in a *loss company at any time.

             (8)  If section 106‑30, 106‑50 or 106‑60 would treat an act referred to in that section that is done in relation to a debt as having been done by an individual, the debt is not a relevant debt interest.

165‑115Z  What constitutes a controlling stake in a company

             (1)  An entity has a controlling stake in a company at a particular time if the entity, or the entity and the entity’s *associates between them:

                     (a)  are able at that time to exercise, or control the exercise of, more than 50% of the voting power in the company (either directly, or indirectly through one or more interposed entities); or

                     (b)  have at that time the right to receive (either directly, or indirectly through one or more interposed entities) more than 50% of any dividends that the company may pay; or

                     (c)  have at that time the right to receive (either directly, or indirectly through one or more interposed entities) more than 50% of any distribution of capital of the company.

Note 1:       The effect of subsection (1) is that, if an entity has a controlling stake in a company, each associate of the entity also has a controlling stake in the company.

Note 2:       Division 167 has special rules for working out rights to voting power, dividends and capital distributions in a company whose shares do not all carry the same rights to those matters.

             (2)  If:

                     (a)  apart from this subsection, an interest that gives an entity and its *associates (if any):

                              (i)  the ability to exercise, or control the exercise of, any of the voting power in a company; or

                             (ii)  the right to receive dividends that a company may pay; or

                            (iii)  the right to receive a distribution of capital of a company;

                            would, in the application of paragraph (1)(a), (b) or (c), be counted more than once; and

                     (b)  the interest is both direct and indirect;

only the direct interest is to be counted.

165‑115ZA  Reductions and other consequences if entity has relevant equity interest or relevant debt interest in loss company immediately before alteration time

Application of section

             (1)  This section applies to an entity (an affected entity) that has a relevant equity interest or a relevant debt interest, or both, in a *loss company immediately before a time (a relevant time) that is an alteration time in respect of the loss company.

Note:          This section and section 165‑115ZB can apply differently for a company that has used the global method of working out whether it has an adjusted unrealised loss at an alteration time. See section 165‑115ZD.

Application of section nullified in certain circumstances

             (2)  However, if:

                     (a)  this section has applied to an entity in respect of a debt owed to the entity; and

                     (b)  Subdivisions 245‑C to 245‑G (which relate to the forgiveness of commercial debts) also applied in respect of the debt at the same time or at a later time;

any reductions or other consequences affecting the entity in respect of the debt under this section are taken not to have occurred or to have been required to occur.

Note:          An amendment of an assessment can be made at any time to give effect to this subsection (see subsection 170(10AA) of the Income Tax Assessment Act 1936).

Reduction of reduced cost base

             (3)  The *reduced cost base of an equity or debt that was *acquired on or after 20 September 1985 is to be reduced immediately before the relevant time by the adjustment amount calculated under section 165‑115ZB.

Reduction of deduction—equity or debt is not trading stock

             (4)  If an equity or debt is not an item of *trading stock of the affected entity immediately before the relevant time, any amount that the entity can deduct in respect of the disposal of any of the equity or debt is to be reduced by the adjustment amount calculated under section 165‑115ZB.

Reduction of cost—equity or debt is trading stock

             (5)  If:

                     (a)  an equity or debt is an item of *trading stock of the affected entity immediately before the relevant time; and

                     (b)  the *cost for the purposes of Division 70 of the equity or debt exceeds its *market value immediately before the relevant time;

then, subject to any later application or applications of this Subdivision, the cost of the equity or debt for the purposes of Division 70, and any deduction for an outlay to *acquire it, are reduced by the lesser of the following amounts or, if they are equal, by one of them:

                     (c)  the adjustment amount calculated under section 165‑115ZB;

                     (d)  the amount of the excess referred to in paragraph (b).

Subsection (4) to apply only in respect of certain income years

             (6)  For the purpose of working out:

                     (a)  deductions under section 8‑1; or

                     (b)  whether an amount is included in assessable income under subsection 70‑35(2); or

                     (c)  whether an amount can be deducted under subsection 70‑35(3);

subsection (5) applies only in respect of income years ending after the later of the following:

                     (d)  the commencement time;

                     (e)  the time 12 months before the relevant time.

Further election to value trading stock

             (7)  If an election has been made under section 70‑45 to value an item of *trading stock on hand at the end of an income year otherwise than at its *cost and subsection (5) applies in respect of it, a further election may be made under that section to value the item of trading stock at cost.

Previous applications of this section in relation to trading stock to be taken into account

             (8)  In applying this section to the affected entity in respect of an equity or debt that is *trading stock of the entity, any previous applications of this section to the entity in respect of the equity or debt are to be taken into account.

Cost of equity or debt that becomes trading stock after relevant time

             (9)  If:

                     (a)  an equity or debt becomes an item of *trading stock of the affected entity after the relevant time; and

                     (b)  had the equity or debt been an item of trading stock of the affected entity at an earlier time that was, or at 2 or more earlier times each of which was, the relevant time for the purposes of a previous application or previous applications of this section, its *cost for the purposes of Division 70 would have exceeded its *market value at the earlier time or at one of the earlier times;

its cost for the purposes of Division 70 is taken to be its market value at the earlier time or the smallest of its market values at the earlier times.

Reduction of proceeds of disposal of trading stock

           (10)  If:

                     (a)  an equity or debt was an item of *trading stock of the affected entity immediately before a relevant time or became such an item of trading stock after a relevant time; and

                     (b)  the equity or debt is *disposed of by the entity after the relevant time concerned; and

                     (c)  the equity or debt is an item of trading stock of the affected entity at the time of the disposal; and

                     (d)  the proceeds of the disposal exceed the *market value of the equity or debt immediately before the relevant time concerned or the market value of the equity or debt immediately before any previous relevant time;

the proceeds of the disposal are taken to be reduced by so much of the amount or the total of the amounts of any reductions made by any previous application or applications of subsection (5) in relation to the affected entity in respect of the equity or debt as does not exceed the excess amount or the greater or greatest of the excess amounts referred to in paragraph (d).

165‑115ZB  Adjustment amounts for the purposes of section 165‑115ZA

          (1A)  This section has effect for the purposes of:

                     (a)  section 165‑115ZA; and

                     (b)  sections 715‑255 and 715‑270 (about effect of alteration time for head company on membership interests of leaving entity just before leaving time).

Calculation of adjustment amount

             (1)  An adjustment amount in relation to an equity or debt is to be worked out by the affected entity, and applied by it in making reductions:

                     (a)  if subsection (2) applies—in accordance with subsection (3); or

                     (b)  otherwise—in accordance with subsection (6).

Selection of method of calculation

             (2)  This subsection applies if:

                     (a)  the affected entity has a relevant equity interest, but does not have a relevant debt interest, in the *loss company immediately before the alteration time and:

                              (i)  all the *shares in the loss company are of the same class and have the same *market value; and

                             (ii)  the equity consists only of a share or shares in the loss company; or

                     (b)  the affected entity has both a relevant equity interest, and a relevant debt interest under subsection 165‑115Y(1), in the loss company immediately before the alteration time and:

                              (i)  all the shares in the loss company are of the same class and have the same market value; and

                             (ii)  the equity consists only of a share or shares in the loss company; and

                            (iii)  the debt consists of a single debt or 2 or more debts of the same kind;

and the reductions that would result from the application of subsection (3) would be reasonable in the circumstances.

Formula method

             (3)  The adjustment amount to be worked out under this subsection is the amount worked out using the formula:

and the amount so worked out is to be applied in making reductions as follows:

                     (a)  the adjustment amount is to be applied in relation to the *share or shares constituting the equity; and

                     (b)  if there is an amount remaining after making reductions in relation to those shares—the amount remaining is to be applied in relation to any debt or, if there is a debt consisting of 2 or more separate debts, in relation to those debts.

Applying adjustment amount under formula method to shares

             (4)  If the adjustment amount referred to in subsection (3) is to be applied in relation to an equity consisting of 2 or more *shares:

                     (a)  it is to be applied equally among the shares; and

                     (b)  if there is any amount remaining after the application of part of the adjustment amount to a share, the amount remaining is to be applied to any other share, or equally among any other shares, to the maximum extent possible.

Applying adjustment amount under formula method to debt

             (5)  If the adjustment amount referred to in subsection (3) or part of it is to be applied in relation to a debt (the overall debt) and the overall debt consists of 2 or more debts (the constituent debts), the amount to be applied in relation to each constituent debt is the amount worked out using the formula:

Non‑formula method

             (6)  The adjustment amount to be worked out under this subsection is the amount that is appropriate having regard to:

                     (a)  the object of this Subdivision and other matters set out in section 165‑115J; and

                     (b)  the extent of the affected entity’s relevant equity interests or relevant debt interests, as the case may be, in the *loss company immediately before the alteration time; and

                     (c)  when, and under what circumstances, the relevant equity interests or relevant debt interests were *acquired by the affected entity; and

                     (d)  the loss company’s overall loss at the alteration time; and

                     (e)  the extent to which that overall loss has reduced the *market values of the equity or debt; and

                      (f)  to prevent double counting, the extent of any adjustments required under this Subdivision because of any application of this Subdivision to another loss company in which the affected entity has a relevant equity interest or relevant debt interest;

and the amount so worked out is to be applied in making reductions in an appropriate way.

How to work out the extent to which the overall loss has reduced the market value of an equity or debt

             (7)  To avoid doubt in applying paragraph (6)(e) in relation to an equity or a debt, if factors other than an overall loss altered the *market value of the equity or debt, the extent to which the overall loss reduced that market value is taken to be the extent to which that market value would have been reduced apart from those other factors.

Note 1:       For a company’s overall loss see subsections 165‑115R(5) and 165‑115S(5).

Note 2:       An example of a factor other than the overall loss is the unrealised value of assets (including assets in respect of which there is an unrealised gain) of the loss company, whether or not generated by outlays or economic losses reflected in the loss for income tax purposes.

165‑115ZC  Notices to be given

Application

             (1)  This section applies when an alteration time occurs in respect of a *loss company.

Note:          Section 165‑115ZC of the Income Tax (Transitional Provisions) Act 1997 affects the operation of this section.

Controlling entity

             (2)  For the purposes of this section, an entity is a controlling entity of a *loss company if:

                     (a)  the entity is not an individual; and

                     (b)  the entity, disregarding any of its *associates, has a controlling stake in the loss company; and

                     (c)  no other entity (except an individual or 2 or more individuals between them) has a controlling stake in the entity.

Foreign resident controlling entity to be disregarded in certain circumstances

             (3)  If:

                     (a)  apart from this subsection, an entity that is a foreign resident would be a controlling entity of a *loss company; and

                     (b)  there is an entity that is an Australian resident and would be a controlling entity of the loss company if all the foreign residents that held direct or indirect interests in the Australian resident were individuals;

then, for the purposes of this section, the entity referred to in paragraph (a) is taken not to be a controlling entity of the company but the Australian resident is taken to be a controlling entity of the company.

Notice by controlling entity of loss company

             (4)  An entity that was a controlling entity of the *loss company immediately before the alteration time must, before the end of 6 months after the latest of the following:

                     (a)  the alteration time;

                     (b)  the day on which the New Business Tax System (Miscellaneous) Act (No. 2) 2000 received the Royal Assent;

                     (c)  the time (if any) specified by the Commissioner;

give a written notice, setting out the information mentioned in subsection (6), to each of its *associates that, to the loss company’s knowledge, had a relevant equity interest or relevant debt interest in the loss company immediately before the alteration time.

Penalty:  30 penalty units.

Notice by loss company

             (5)  If:

                     (a)  there was no controlling entity of the *