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Adjustment of capital allowances, losses or donations between income subject to tax at different rates

Income Tax Act 1947

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—(1) This section applies where —(a)a company has income subject to tax at different rates of tax for the year of assessment concerned, and there are UALD in respect of income that is subject to tax at one of those rates of tax; or(b)a company has income subject to tax at one rate of tax for the year of assessment concerned and income subject to tax at a different rate of tax for an earlier year of assessment, and there are UALD in respect of the second‑mentioned income.(2) For the purposes of subsection (1), income may be subject to tax at different rates of tax even if the income is derived from carrying on the same trade or business.(3) Subsection (1)(b) does not include a case where one of the rates of tax is that in section 43(1)(a) and the other rate of tax is also that in section 43(1)(a), but amended.(4) Where the UALD relate to income of the company that is subject to tax at the lower rate of tax, then those UALD are to be deducted against the income of the company subject to tax at the higher rate of tax (if it is chargeable income) in accordance with the following provisions:(a)in a case where the amount of those UALD does not exceed that chargeable income multiplied by the adjustment factor —(i)that chargeable income is reduced by an amount arrived at by dividing the amount of those UALD by the adjustment factor; and(ii)the amount of those UALD is accordingly nil;(b)in any other case —(i)the amount of those UALD is reduced by an amount arrived at by multiplying the amount of that chargeable income by the adjustment factor, and —(A)the remaining UALD; or(B)if the remaining UALD are then reduced by one or more applications of subsection (6)(b) — the remaining UALD (if any) after such reduction or reductions,are added to, and deemed to form part of, the corresponding allowances, losses or donations in respect of the income subject to tax at the lower rate of tax, for the next succeeding year of assessment and any subsequent year of assessment in accordance with section 23 or 37, as the case may be; and(ii)that chargeable income is accordingly nil.(5) Where the UALD relate to income of the company that is subject to tax at the higher rate of tax, then those UALD are to be deducted against the income of the company subject to tax at the lower rate of tax (if it is chargeable income) in accordance with the following provisions:(a)in a case where the amount of those UALD does not exceed that chargeable income divided by the adjustment factor —(i)that chargeable income is reduced by an amount arrived at by multiplying the amount of those UALD by the adjustment factor; and(ii)the amount of those UALD is accordingly nil;(b)in any other case —(i)the amount of those UALD is reduced by an amount arrived at by dividing the amount of that chargeable income by the adjustment factor, and —(A)the remaining UALD; or(B)if the remaining UALD are then reduced by one or more applications of subsection (6)(b) — the remaining UALD (if any) after such reduction or reductions,are added to, and deemed to form part of, the corresponding allowances, losses or donations in respect of the income subject to tax at the higher rate of tax, for the next succeeding year of assessment and any subsequent year of assessment in accordance with section 23 or 37, as the case may be; and(ii)that chargeable income is accordingly nil.(6) Where, in a case mentioned in subsection (1)(a), the company has income subject to tax at 3 or more rates of tax (called in this subsection applicable tax rates), then for the purposes of subsection (4) or (5) —(a)the company may elect its income that is subject to tax at one of the applicable tax rates as its income that is subject to tax at a lower or higher rate of tax, as the case may be;(b)the UALD in respect of the company’s income that is subject to tax at the lower or higher rate of tax (as the case may be), that have been reduced in accordance with subsection (4)(b) or (5)(b), may be further deducted in accordance with that provision against the company’s remaining income that is subject to tax at an applicable tax rate; and(c)paragraph (b) continues to apply until the amount of the UALD becomes nil or the company has no more income subject to tax at an applicable rate against which the deduction may be made.(7) Where —(a)the income in respect of which there are UALD is subject to tax at the lower rate of tax; and(b)the company ceases to derive that income in the basis period for the year of assessment concerned,subsection (4) applies, with the necessary modifications, to the UALD mentioned in paragraph (a) for the purpose of deducting them against the income of the company subject to tax at the higher rate of tax (if it is chargeable income) for any year of assessment subsequent to the year of assessment concerned.(8) Where —(a)the income in respect of which there are UALD is subject to tax at the higher rate of tax; and(b)the company ceases to derive that income in the basis period for the year of assessment concerned,subsection (5) applies, with the necessary modifications, to the UALD mentioned in paragraph (a) for the purpose of deducting them against the income of the company subject to tax at the lower rate of tax (if it is chargeable income) for any year of assessment subsequent to the year of assessment concerned.(9) Nothing in this section is to be construed as affecting the application of section 23 or 37 unless otherwise provided in this section.(10) If, during the basis period for any year of assessment (called in this subsection the relevant year of assessment), a company only derives income that is exempt from tax, then subsection (5) applies, with the necessary modifications, to any year of assessment subsequent to the relevant year of assessment as if any sum allowable under section 37(3)(b), (c), (d) or (f) in respect of any donation made by that company during the basis period for the relevant year of assessment were unabsorbed donation in respect of the income of a company that is subject to tax at the rate of tax specified in section 43(1)(a).(11) In this section —“adjustment factor” means the factor ascertained in accordance with the formulawhere —(a)A is the higher rate of tax; and(b)B is the lower rate of tax;“allowances” means allowances under section 16, 17, 18B, 18C, 19, 19A, 19B, 19C, 19D, 20, 21, 22 or 23, including unabsorbed allowances that arose in any year of assessment before the year of assessment 1994;“donations” means donations that are deductible including any unabsorbed donations allowable under section 37;“losses” means losses that are deductible under section 37 including unabsorbed losses incurred in respect of any year of assessment before the year of assessment 1994;“rate of tax” means —(a)the rate of tax under section 43(1)(a); or(b)the concessionary rate of tax in accordance with —(i)any order made under section 13(12); or(ii)section 43A, 43C, 43D of this Act as in force before 29 December 2016, 43D, 43F of this Act as in force before 29 December 2016, 43E, 43H of this Act as in force before 29 December 2016, 43F, 43G, 43K of this Act as in force before 29 December 2016, 43L of this Act as in force before 1 November 2006, 43M of this Act as in force before 3 December 2003, 43H, 43I, 43J, 43K, 43S of this Act as in force before 29 December 2016, 43T of this Act as in force before 29 December 2016, 43U of this Act as in force before 26 October 2017, 43V of this Act as in force before 29 December 2016, 43L, 43M, 43N, 43O, 43P, 43Q, 43R, 43S, 43T, 43U, 43V, 43W or 43X, or the regulations made under any of those sections, as the case may be;“UALD” or “unabsorbed allowances, losses or donations”, in relation to the income of a company that is subject to tax at a particular rate of tax, means the balance of such allowances, losses or donations after deducting the expenses, donations, allowances or losses allowable under this Act against that income.[37B

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