Accounting for tax loss transfers

A company can transfer its tax losses to reduce the taxable income of another company in the group, provided that there is at least 66% commonality of ownership.

Tax losses can be transferred by loss offset election or subvention payment or a combination of these methods. A subvention payment is an actual payment for the gross amount of the tax losses transferred, whereas a loss offset is a transfer of tax losses for no payment.

It is reasonably common for tax losses to be transferred by 28% subvention payment and 72% loss offset. Using this combination, the amount paid equals the tax savings associated with the losses transferred. It is also reasonably common, particularly in wholly owned groups, to transfer tax losses by 100% loss offset and by 100% subvention payment.

Tax loss transfers are optional. A company can carry forward its tax losses instead of transferring the losses to another company.

Accounting treatment

The accounting treatment of tax loss transfer arrangements is not specifically addressed in NZ IAS 12. Accounting for these arrangements can depend on when decisions are made and how the tax losses are transferred.

Decisions about whether or how to transfer tax losses for any particular year will often not made until several months after the financial statements for that year have been finalised. As a result, in many cases, the accounting adjustments for tax loss transfer arrangements will not be recognised until the following year. However, where there is sufficient certainty regarding the transfer of tax losses, the financial statements may include adjustments for the expected tax loss transfer for the current year.

For example, if there is a group policy regarding the transfer of tax losses by 28% subvention payment, and other entities in the group have sufficient tax profits, an entity with tax losses could recognise a subvention receivable based on 28% of its tax losses. Similarly, if an entity is expecting to receive tax losses by 100% loss offset to eliminate its taxable income, the current tax calculation could include the expected loss offset. It would not be necessary to recognise a tax liability and reverse it in the following year.

Subvention payments for 100% of the tax losses transferred should be recognised as expenditure. These payments should not be recognised in tax expense and should not be shown as distributions to owners. Some entities prefer to show subvention payments as a separate item after net surplus, but before tax expense. For example:

Subvention receipts for 100% of the tax losses transferred should be recognised as income and would generally be separately disclosed. These receipts should not be shown as dividend income.

An adjustment to reduce the tax payable balance as a result of a 100% loss offset for the prior year would be credited to tax expense and would be included in the adjustment to current tax for prior periods shown in the tax note. An expected 100% loss offset for the current year would simply result in a smaller figure being initially recognised as current tax and would usually be shown as a reconciling item in the tax note. For example:

Subvention payments for 28% of the tax losses transferred would typically be recognised against the tax payable account, instead of being recognised as an expense. In this situation, the subvention payment is essentially treated in the same way as a tax payment, and as a result, no adjustment is required to current tax expense. The other option would be to show the subvention payment as an expense and reduce current tax expense by the tax effect of the losses transferred. However, under either option the figure for net surplus after tax would be the same.

Subvention receivables for 28% of the losses transferred would often be credited to current tax expense, rather than being credited to income. At a group level, this adjustment would be offset against the current tax expense balances of other entities, and the subvention receivable balance would be offset against the tax payable balances of other entities. Any differences between the estimated receivable and the actual amount received would be recognised as an adjustment in the following year. The other option with 28% subvention receipts is to simply recognise them as income and show no credit to tax expense.

In a consolidated tax group, tax losses are automatically offset against the tax profits of other entities in the group. The group may decide make payments for the tax effect of the tax losses transferred, but they are not technically subvention payments. Any payments for tax losses would usually be recognised against the tax payable account, and essentially be treated in the same way as tax payments. Any expected receivable in relation to tax losses transferred within the consolidated tax group would usually be disclosed as a current tax asset and credited to current tax expense. At a group level, the credit to current tax expense would be offset against the current tax expense balances of other entities, and the current tax asset would be offset against the tax payable balances of other entities.

Large subvention payments would usually be separately disclosed in the operating activities section of the cash flow statement. Subvention payments should not be included in the figure for tax paid.

Tax loss transfer arrangements need to be clearly disclosed in the either the related party note or the tax note. This disclosure may include information regarding the proposed arrangement for the current year as well as the actual loss transfers for the prior year. Often a text note is the best way to clearly describe these arrangements. For example:

The company's tax liability in relation to 2023 was reduced by tax losses of $82,000 transferred from Te Motu Holdings Limited by subvention payment of $22,960 and loss offset of $59,040.

An entity that has disclosed an expected transfer of its tax losses should not also disclose these losses as unrecognised tax losses and should not include these losses in their deferred tax calculation.

Disclaimer:
This document is intended only as a general guide, and should not be used or relied upon as a substitute for specific professional advice. No liability is accepted for loss or damage incurred by persons who rely on this document.

Page created: 13 May 2024