Appropriate treatment
Enquiry:
In the 2016/17 income year, our company incurred tax losses of $150,000. In the 2017/18 income year, we had a taxable income of $200,000. In preparing our company's 2017/18 income tax return, we wish to deduct part of the $150,000 of carrying forward losses against all of the taxable income.
In the 2017/18 income year, we also received franked dividends with $60,000 franking credits attached. The company income tax rate is 30%.
How would the franking offsets be treated?
Explanation:
Corporate tax entities are generally able to choose the amount of prior-year tax loss they wish to deduct in a later tax year (ITAA97, s. 36-17). Rules restricting the extent to which prior year losses can be deducted apply in certain circumstances:
- An entity cannot choose to deduct any prior year losses where there is a number of excess franking offsets (i.e. unused franking credits) (s. 36-17(5)(a)).
- An entity cannot deduct a loss that will result in an excess franking offset (s. 36-17(5)(b)).
These restrictions are designed to prevent companies from refreshing prior-year tax losses into current year tax losses, thereby making tests such as the COT easier to satisfy.
In your scenario, the gross company income tax payable = $200,000 * 30% = $60,000. If your company applies the 2017 loss to reduce its 2018 taxable income, it would result in excess franking offsets. Therefore, your company could not deduct any prior year losses.