Now in its fifth year, the resources downturn has left a path of destruction through extractives firms.
Hundreds of billions of dollars have been spent on major projects, and on exploration and development throughout the world, yet many of these investments have not yet resulted in profitable going concern ventures. Among some of the tangible assets that remain are tax losses.
Resources firms should spend effort to consider how to take advantage of these embedded assets.
ATO data has indicated that the carried forward loss balance for all Australian companies in 2009-10 was around $170 billion. The portion of tax loses in the resources sector has only grown proportionately since then.
Monetizing tax losses is certainly neither easy nor clear cut, and tax rules can vary dramatically by jurisdiction, but the effort needed to structure transactions that include tax losses can provide significant benefit to shareholders.
In Australia, a tax loss generally will arise when the total deductions claimed for an income year (excluding tax losses from earlier income years) are more than total assessable income and net exempt income for that income year.
The amount of the tax loss will be the amount of the excess.
As a general matter, companies may not deduct a tax loss unless either of the following applies: (i) It has the same owners and the same control throughout the period from the start of the loss year to the end of the income year (the continuity of ownership test); or (ii) It carried on the same business throughout a specified period (the same business test).
If you have tax losses from several previous years, you must claim the entire loss you incurred from the earliest year before you can claim all or part of a tax loss from a later year. You can use your tax losses from earlier income years to reduce your Australian income to zero only.
If your tax losses from earlier income years are more than your Australian income, you must keep a record of the tax losses to claim the extra tax loss amount in a later year. You can carry forward most tax losses indefinitely.
The continuity of ownership test is met where the same persons have maintained more than 50 percent of the voting power in the company, rights to dividends and rights to capital distributions at all times during the "ownership test period", which is the start of the loss year to the end of the income year in which the losses are to be utilised.
Thus, as long as the same persons have maintained more than 50% of the voting, dividend and capital rights, a company can conduct a capital raising, merger or other transaction that enables the new investors to take advantage of the tax losses. In such a case, the company can move into a new business venture – for example, changing industries into an area that will have regular profitability that could take advantage of the losses.
This is of course advantageous if an extractives sector junior company is unlikely to enter into production in the foreseeable future.
Alternatively, the tax losses may be maintained if the company meets the same business test.
This will generally be met if throughout the relevant period the company carries on the same business as it carried on immediately before the tax loses were incurred. The same business test may be less relevant to resource juniors unless they merge with profitable mining operations that are conducting the same business.
The ATO may undertake stringent reviews of such transactions, so adequate records will be essential. Seeking prior guidance from the ATO may be strategically appropriate prior to entering into any transaction that seeks to utilise tax losses.
Finally, where a company may choose not to utilise tax losses in the current year, transactions such as takeovers, mergers, capital raisings and other transactions can impact the ability of the company to utilize these benefits into the future.
Careful consideration should be paid to ensuring any such transaction does not minimise the future value of such offsets.
