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losses of a company

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by

Nicole L

on 30 October 2013

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Transcript of losses of a company

Losses of a company
Wheezing: a whistling sound usually heard when breathing in and out
Coughing: a harsh cough that usually promotes pain and does not go away
Tight Chest Pains: a feeling as if something is squeezing or putting pressure on your chest
Shortness of breath: feeling like you cannot catch your breath or like you cannot get enough air in your lungs
Exact cause is unknown, however, genetics and environmental factors may play a significant role
parents with asthma
respiratory infections during childhood
contact with airborne allergens
exposure to viral infections in the early years of childhood
Thanks for your
kind attention!


Case 1:
Golden Thai restaurant
CONCLUSION
s165-93 ITAA (1997):
A company cannot deduct a tax loss unless it meets either the COT or SBT
s36-17 ITAA (1997):
A company can only deduct the tax loss to the extent that it has not been deducted
Immediately after the share transfer, Sarah introduced a new menu
features largely Japanese dishes with a hint of Thai flavour
, instead of traditional Thai dishes.
The
name and decoration
of the restaurant was also changed after the share transfer to reflect the new menu.
The company also published a book in late 2013
featuring the signature dishes of the restaurant
. The book was a bestseller, contributing a significant amount of revenue to the company.
The company turned around in this income year and became
profitable again
.
Whether it can use the carry forward losses in the current income year...
An Australian incorporated company, running a Thai restaurant, serving
traditional Thai food
.
It has two shareholders, Graeme (90% shares) and Sarah (10% shares).
Tax losses of $300,000 in
each of the last two years
.
On 1 July 2013,
60%
shares were transferred, Graeme holding 30% and Sarah holding 70%.
Graeme claimed a capital loss of $600,000 on the sale of shares to Sarah.


Legal issues
“A company cannot deduct a tax loss unless either it meets the conditions of s 165-12 (which is about the company maintaining
the same owners
), or it meets the condition in s165-13 (which is about the company satisfying

the same business test
)”.
S165-10(a)(b) ITAA 1997
COT
S165-12 of ITAA (1997)
the ownership
test period
is the period from the start of the loss year to the end of the income year
S165-12 of ITAA (1997)
50%
of voting, dividend and capital distribution right must be “beneficially owned” by “same persons” throughout ownership test period.
nothing but jump here
same person same share rule
S165-165 ITAA (1997)
if “…the only shares in the company that are taken into account are exactly the same shares and are held by the same persons...”, the ownership rights attaching to this shareholder’s interest can be considered.
Control of Voting Power Test (CVPT)
Even if the COT is satisfied, the tax losses will be denied if the company changes in control of voting power during ownership test period or the change occurs for the purpose of attaining a tax benefit (s165-15 ITAA 1997)
SBT
Should satisfied can carry forward the tax loss indefinitely from the current income year with a maximum of $600,000.
As evidenced, however, Golden Thai Pty Ltd will most likely fail both the COT and SBT; the company is therefore not qualified to deduct a tax loss.
Lawless Pty Ltd’s tax schedule
for the past three periods
The Earliest Year (13-14’)
The Middle Year (14-15’)
What if Lawless Pty Ltd had an existing franking balance of $12,000?
the sum of the loss carry back offset component remains the same ($150,000)
$180,000 (as per s160-15(1(c)) exceed the franking credit balance $12,000
Therefore, $12,000 would become the maximum loss carry back tax offset available to the entity.
Case 2:
Lawless Pty Ltd
The company incorporated in Australia, incurred a tax loss of $600,000 in
2015-16.

Its franking account balance at the end of the income year is 200,000.
The company’s
tax liabilities
for
2013-14
and
2014-15
were
$120,000
and
$30,000
respectively.
It derived $20,000 exempt income in
2013-14
.
The company had lodged a tax return every year for the past 5 years.
The shareholders of Lawless Pty Ltd have remained
unchanged
since incorporation.
Group members
s165-210(1) (1997): “A company satisfies the same business test if throughout the same business test period it carries on the same business as it carried on immediately before the test time.”
“sudden and dramatic” (ATO ruling 1999/9)
“organic growth ” :
J. Walton in Rolls Royce Ltd v Bamford (1976)
Avondale Motors P/L v FCT (1971)
Failed
change in trading name, location, new employees and differing stock
AGC Advances v FCT (1975)
Passed
Despite the change in name and clientele, there's very little change in the nature of the business
Fielder Downs P/L v FCT (1979)
Failed
The taxpayer transformed operations from growing clover and cereals to cattle grazing
Issue of the book
s165-210(2)(b): the company will NOT satisfy the same business test if it “derives assessable income from a transaction of a kind that it had not entered into in the course of its business operations before the test time.”
ATO ruling 1999/9: “the new transactions test allows a business to expand and develop, provided the activities by which it produces its income remain of the same kind”
New transactions test
The release of the book is both
too significant
to the company’s profitability, and
too extraordinary
in the context of the business’ operations to ignore, and hence, resultantly, the company will most likely fail the SBT
According to s160-10 the test is satisfied when an entity proves, during the relevant tax year,
a) it was a corporate tax entity,
b) it sustained losses in either or both
(i) the current year;
(ii) the income year before the current year (the middle year),
c) it had an income tax liability in
(i) the middle year,
(ii) the year before the middle year, and
d) the entity had lodged a tax return for the past five income years.
1st
2nd
3rd
4th
Carry back a $420,000 tax loss from the current year (15-16’) to the earliest year (13-14’).
Subtracts the $20,000 net exempt income from the amount in Step 1, which equals $400,000 (420,000-20,000).
$400,000 x 30% = $120,000
The result from Step 3 will reduce the income tax liability in the earliest year (13-14’) by $120,000. Therefore the tax liability of the earliest year (13-14’) is reduced to a nil balance.
1st
2nd
3rd
4th
carry back a tax loss $100,000
There is no net exempt income in the middle year (14-15’)
$100,000 x 30% = 30,000
The $30,000 reduces the income tax liability for the middle year (14-15’).
As the total loss carry back tax offset of $150,000 (120,000 + 30,000 )is the lesser of both $180,000 and Lawless Pty Ltd’s end-year franking credit balance ($200,000), $150,000 is the maximum tax offset available to Lawless Pty Ltd.
Under s160-15(1) the highest maximum loss to be carried back is the lowest of:
(a) The sum of the loss carry back tax offset components (existing tax liabilities) for the earliest and middle years
(b) The entities current franking account balance for the current income year; or
(c) $1,000,000 multiplied by the corporate tax rate for the year the entity makes the claim.
Will Richard
Xin Yan
Jue Wang
Bernard Ross
Yina Lu
Zhen Liu
Lecturer
Antony Ting
Full transcript