Incorporated societies-carrying forward and grouping tax losses

Section OB 1 of the Income Tax Act 1994 and 2004, new sections OD 3(4) and OD 3(5) of the Income Tax Act 1994, and section 8B of the Income Tax Act 1976

Introduction

The definition of "special corporate entity" has been amended to include incorporated societies that have no shares on issue to members of the society. The effect of this amendment is to allow such incorporated societies to carry forward tax losses and offset income and losses against the income and losses of companies in the same group.

The amendments also allow commonly owned incorporated societies to offset income and losses for the 1997-98 to 2002-03 income years.

Background

The amendments ensure that incorporated societies which are treated as companies for tax purposes, can access the same provisions that allow other corporate entities to carry forward losses and offset them against those of companies in the same group.

Before 1992, incorporated societies were able to carry forward and offset their tax losses. In 1992, the loss carrying forward rules were substantially overhauled. An unintended consequence of this overhaul was that incorporated societies were now required to satisfy the shareholder continuity test in order to access the loss provisions.

Incorporated societies may not satisfy the shareholder continuity test on the grounds that they do not issue shares and previously could not be exempted from this requirement as they did not fall within the definition of "special corporate entity". Since 1992, some incorporated societies have applied the loss provisions as if they applied to them, while others have followed the letter of the law.

Key features

The definition of "special corporate entity" in section OB 1 of the 1994 and 2004 Acts has been amended to include any body incorporated under the Incorporated Societies Act 1908 that has no shares on issue to members of the society. A similar amendment has been made to section 8G of the Income Tax Act 1976. This allows incorporated societies to carry forward tax losses and offset income and losses against those of companies in the same group.

New section OD 3(4) of the Income Tax Act 1994 allows commonly owned incorporated societies that do not issue shares to offset income and losses within the same group of companies for the 1997-98 to 2002-03 income years. This provision treats a member of an incorporated society that does not issue shares as holding a share, and these shares carry all the shareholder decision making rights. The result is that a voting interest is created that can be used for the purposes of subpart IG of the Act.

New section OD 3(5) of the Income Tax Act 1994 ensures that incorporated societies that applied new section OD 3(4), do not breach continuity upon being treated as a "special corporate entity" in the 2003-04 income year.

Application date

The amendment allowing incorporated societies to carry forward losses and offset income and losses against those of companies in the same group has two application dates:

• In relation to the carry forward of tax losses, the amendment applies from the 1992-93 income year.
• In relation to the offsetting of income and losses by incorporated societies and companies that are in the same group, the amendment applies from the 1992-93 income year if the society has, before 29 March 2004 (date of introduction of the bill), filed a tax return and the society has adopted a tax position in that return that is consistent with the proposed amendments.

The amendment that allows commonly owned incorporated societies to offset income and losses, applies from the 1997-98 income year to the 2002-03 income year if the incorporated societies have taken this tax position in relation to tax returns filed for those years.