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Income Tax Act 2007

Treatment of tax losses - Use of tax losses by consolidated groups

ID 4: Pre-consolidation losses on entry: part-year rule

You could also call this:

“Calculating how much of a company's loss can be used when it joins a group part-way through the year”

When a company joins a consolidated group and has a loss balance, there are special rules about how much of that loss can be used by the group. You need to figure out the smaller amount between what the company shows in its financial statements and what you get from a special calculation. But remember, it can’t be more than a certain limit.

If you want to use the financial statements to show the amount, you need to give them to the Commissioner when you file the group’s tax return. These statements should only cover the time the company was part of the group and show how much income the company made during that time.

There’s also a special calculation you can use. It looks like this: unused amount - (part-year net income + part-year net loss). The ‘unused amount’ is the loss from earlier years that would normally be taken off the group’s income. ‘Part-year net income’ is what the company earned before joining the group. ‘Part-year net loss’ is any loss that had to be used in another group the company was in before joining this one.

This rule is more important than the general rule about using losses when joining a group. It helps make sure that losses are used fairly when a company joins a group partway through the year.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1517756.

Topics:
Money and consumer rights > Taxes
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ID 3: Pre-consolidation losses: use by group companies, or

“How group companies can use losses from before a company joined the group”

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ID 5: Pre-consolidation losses on exit: part-year rule, or

“Rules for carrying forward losses when a company leaves a consolidated group during a tax year”

Part I Treatment of tax losses
Use of tax losses by consolidated groups

ID 4Pre-consolidation losses on entry: part-year rule

  1. This section applies if a company that is part of a consolidated group has a loss balance to which section ID 2 applies in a tax year when the company joins the consolidated group.

  2. The amount of the loss balance to be made available to the consolidated group under section ID 2(2) is the lesser of the amount the company establishes in financial statements under subsection (3), or the amount calculated using the formula in subsection (4), but in either case, it must not be more than the limit set out in section ID 3(2).

  3. The company may establish the amount to be made available by providing the Commissioner, at the time of providing the consolidated group’s return of income, with adequate financial statements that—

  4. relate to the part of the tax year when the company was part of the consolidated group; and
    1. disclose the amount that would be the net income attributable to the part of the tax year when the company was part of the consolidated group, determined on a fair and reasonable basis of attribution.

      1. The amount that may be made available under section ID 2(2) and referred to in subsection (2) is calculated using the formula—

        unused amount − (part-year net income + part-year net loss).

        Where:

        • In the formula,—

        • unused amount is the loss balance carried forward from an earlier tax year or years that would be subtracted from the consolidated group’s net income for the tax year in the absence of section ID 3 or this section:
          1. part-year net income is the company’s net income for the part of the tax year before the company joins the consolidated group:
            1. part-year net loss is the amount of a pre-consolidation tax loss that must be subtracted under section ID 2 from the net income of another consolidated group of which the company was part in the tax year before joining the consolidated group referred to in subsection (1).

              1. This section overrides section ID 2.

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