From time to time, M&A occurs where the target has historical carried forward tax losses. While in most cases a target’s tax losses will not factor into the purchase price, there may be value to the buyer in the losses post-acquisition if they can be utilised to offset taxable income. This will depend on a variety of factors including the nature of the business carried on by the target, where the target sits in the broader group, and whether the group is consolidated from an income tax perspective.
Under Australia's tax consolidation regime, when a target with carried forward tax losses joins a consolidated group, the group can choose whether those losses transfer to the head company or are cancelled. Cancelling the losses increases the tax cost bases allocated to the target's assets for depreciation and CGT purposes, whereas allowing the losses to transfer preserves them for future use, subject to a cap on the rate they can be utilised (called the Available Fraction (AF)).
The Australian Taxation Office (ATO) has publicly flagged that in its review activity for tax consolidated groups it will focus on whether tax losses have been correctly transferred, the AF has been correctly calculated, and losses correctly used. Incorrectly transferring or using losses is an issue that will attract ATO scrutiny.
A recent decision of Justice Jackman in the Federal Court, Evolution Mining Limited v Commissioner of Taxation [2026] FCA 935 (delivered on 17 July 2026), considered in what circumstances a decision to cancel the transfer of tax losses to a head company will be effective. This decision was interlocutory and the main issue – whether tax losses are available for recoupment – remains in dispute.
On 31 July 2026, the Commissioner applied for leave to appeal the interlocutory decision to the Full Court of the Federal Court.
Pending the outcome of the application, the takeaways from this decision for tax and legal professionals managing tax consolidated groups are:
- tax consolidation calculations should be undertaken as soon as possible to identify and understand the tax outcomes. An important input is valuations, so qualified valuers should be engaged promptly (valuations are also often required for stamp duty purposes); and
- subject to any different findings on appeal, the choice to cancel the transfer of tax losses needs to be made as part of or prior to lodging the income tax return referable to when an entity joins the consolidated group. In the absence of such a choice the transfer of tax losses will occur automatically (subject to meeting the relevant loss transfer tests). Taxpayers should be aware of the implications and lodge income tax returns consistently in future years to mitigate the risk of penalties.
The tax consolidation regime
The income tax consolidation regime allows large corporate groups to simplify their income tax compliance. Broadly, group members are treated as part of the head company for income tax return purposes, with the result that only one income tax return is required, and intragroup transactions are ignored.
Ongoing simplification comes at the cost of upfront compliance (namely, ATO notification, and accession deeds for the tax sharing and funding agreements) and calculations. When subsidiaries join tax consolidated groups, the head company acquires a deemed cost base for the subsidiary’s underlying assets. The tax cost setting process requires complex tax calculations, and the requirement to consider whether losses will be transferred or cancelled.
As Justice Jackman notes in his judgment, cancelling the transfer of a loss will have the effect of:
- increasing the “allocable cost amount” (ACA) for a joining entity when that entity becomes a subsidiary member of the group; and
- preserving the existing AF for bundles of losses previously transferred to the head company by other entities. The AF restricts how much of the group’s income can be offset by that bundle each year.
It is common practice to cancel the transfer of tax losses where the transfer adversely affects the AF of more material loss bundles. A higher ACA on cancelling the transfer of tax losses could also give rise to increased tax depreciation deductions and higher cost bases for capital gains tax purposes. The latter may be useful in the case where particular assets of the joining entity are intended to be sold.
The issues in dispute in the Evolution decision
This decision concerned whether a choice purportedly made by Evolution Mining Limited (Evolution) to cancel transferred losses was too late and of no effect. This confined legal question was carved out from the main proceedings under which the Commissioner of Taxation is contesting the use of tax losses by Evolution in 2017.
In income years ended 30 June 2007 to 30 June 2010, Conquest Mining Limited (Conquest) accrued tax losses in the total amount of $31,292,880 (the Conquest Tax Losses). Conquest was acquired by Evolution on 2 November 2011, at which time Conquest joined the Evolution tax consolidated group.
Subsequently, three income tax returns were lodged by Evolution:
- on 25 June 2014, Evolution lodged its 2012 tax return, in which it did not exercise any choice to cancel the transfer of the Conquest Tax Losses;
- on 22 August 2014, Evolution lodged its 2013 income tax return with the same approach; and
- on 13 March 2015, Evolution lodged its 2014 tax return, in which it recorded the cancellation of the transfer of losses which included the Conquest Tax Losses.
The Commissioner of Taxation contended that the choice made on 13 March 2015 to cancel the Conquest Tax Losses was effective. Evolution contended that it was not.
Findings by Justice Jackman
In siding with the taxpayer, Justice Jackman considered the statutory regime and highlighted that:
- the automatic transfer of tax losses has important consequences for the head company in terms of calculating the ACA and AF, as well as potential capital gains tax events. The tax legislation contemplates that the ACA and AF will be calculated at the joining time with immediate implications from the joining year onwards; and
- there is no provision which expressly contemplates these calculations being re-calculated in the event a choice to cancel the transfer of a tax loss is made in relation to an income year after the joining year. The absence of a provision tended strongly to support the proposition that such a choice cannot be made later.
Accordingly, Justice Jackman concluded Evolution’s purported choice to cancel the transfer of the Conquest Tax Losses in its income tax return for the 2014 income year was too late to be effective.
Takeaways
Taxpayers should work with their advisers as soon as possible after M&A to identify and mitigate adverse effects arising under the tax consolidation provisions.
The decision is a timely reminder for taxpayers and their tax agents that tax consolidation impacts need to be properly considered prior to lodgement. A choice down the track will not retroactively override the position at lodgement. The ATO will scrutinise whether tax losses have been correctly used, and income tax returns should be lodged consistently to mitigate potential penalties. While this confined legal issue has been resolved whether the Conquest Tax Losses are able to be utilised by Evolution remains disputed by the parties.
As noted above, an application for leave to appeal was filed by the Commissioner on 31 July 2026, and the Full Court may provide further guidance on this issue.
Our Tax team can assist you with any queries in respect of the tax consolidation provisions and avenues to properly document decisions and mitigate adverse tax outcomes.
Australian Taxation Office public guidance last updated 30 January 2026, “Consolidation issues”.