Federal Court clarifies loss transfer cancellations: A win by retaining losses

The Federal Court of Australia has found that a choice made by a taxpayer in a tax return, purporting to cancel the transfer of certain tax losses, did not in fact cancel that transfer. On the Court’s construction of the relevant legislation, the cancellation occurred too late to be effective.

The Federal Court of Australia has delivered judgment in Evolution Mining Limited v Commissioner of Taxation [2026] FCA 935, determining that a choice made in a particular tax return did not effectively cancel a prior transfer of certain tax losses.

The particular tax losses were transferred to the taxpayer in the 2012 income year. In its tax return for the 2014 income year, the taxpayer recorded that it had cancelled the transfer of those losses. On the Court’s construction of the statutory provision by which the transfer of tax losses may be cancelled, it held that, by the time that choice was recorded, it was too late to cancel the transfer.

The Federal Court’s judgment provides valuable insight into the operation of s 707-145 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), the provision which governs the ability of the head company of a consolidated group to cancel the transfer of tax losses. It also demonstrates the fundamental importance of context, purpose and timing when undertaking statutory construction.

Corrs acted for the successful taxpayer, Evolution Mining Limited (Evolution).

Background to Evolution Mining Limited v Commissioner of Taxation

In November 2011, Evolution (as the head company of a consolidated group) acquired all of the shares in Conquest Mining Limited (Conquest) (and the head company of another consolidated group). At the time of acquisition, Conquest had accumulated significant carry forward tax losses arising from the operation of its mining business.

In the course of a broader tax dispute between the parties, an anterior issue arose regarding whether the transfer of certain of those losses from Conquest to Evolution had been cancelled. This was because on 13 March 2015, Evolution lodged its 2014 tax return, in which it recorded the cancellation of the transfer. Evolution had not, however, recorded such a cancellation in either its 2012 tax return or its 2013 tax return.

The Commissioner argued that the choice as recorded in the 2014 tax return operated pursuant to s 707-145 to cancel any transfer of losses in November 2011, with the result that Evolution could not utilise those losses in future income years.

Evolution, conversely, contended that in the circumstances and in view of the correct construction of s 707-145, any choice it had purportedly made in the 2014 tax return, insofar as that choice related to the transfer of losses in November 2011, was ineffective.

The Court’s decision

When this dispute came before Jackman J in the Federal Court, his Honour ordered that it be resolved by means of a separate question. As amended, the separate question was:

“Was the choice made in Part B of the losses schedule to the 2014 income tax return of Evolution Mining Ltd lodged on or about 13 March 2015 effective for the purposes of s 707-145 of the Income Tax Assessment Act 1997 (Cth) to cancel any transfer of the Updated Conquest Tax Losses?”

The judgment of Jackman J, delivered on 17 July 2026, was directed solely towards answering this separate question. His Honour found in favour of Evolution, concluding that the separate question should be answered “in the negative”.

Legislative provisions and the parties’ positions

Under s 707-120 of the ITAA 1997, tax losses of an entity that joins a consolidated group are automatically transferred at the joining time to the head company of that group, provided certain conditions are met. Under s 707-145, however, the head company can choose to cancel that transfer. Section 707-145 provides: 

Cancelling the transfer of the loss

1. The head company of the joined group may choose to cancel the transfer of the loss.
    
2. If the head company of the joined group does so, this Act (except this section) operates for all income years ending after the transfer as if it had not occurred under section 707-120.
    
3. The choice cannot be revoked.

As observed by Jackman J, the consequences flowing from a cancellation under s 707-145 are: 

• cancelling the transfer of a loss has the effect of increasing the ‘allocable cost amount' (ACA) for a joining entity when it becomes a subsidiary member of a consolidated group; and

• cancelling the transfer of a loss has the effect of preserving the existing ‘available fractions’ for bundles of losses previously transferred to the head company by other entities.

In view of the potential impact such a choice may have on these fundamental concepts underpinning the tax consolidation regime within Part 3-90 of the ITAA 1997, Evolution argued that there is a limit to the time by which a choice to cancel a transfer of losses under s 707-145 can be made. Evolution argued that this was so notwithstanding the absence of any express limitation in the terms of s 707-145.

Further, Evolution contended that any choice to cancel the transfer must be made in relation to the joining year (i.e. the year in which the joining time occurs), which is typically demonstrated or reflected in the income tax return lodged for that year.

The Commissioner took the contrary view. The Commissioner submitted that the language of s 707-145 does not make any prescription as to the time or manner of the choice, and that Evolution’s approach impermissibly sought to read words into the statute, or imply a meaning at variance with the language used. On the Commissioner’s construction, a transfer can be cancelled at any time, albeit prior to the utilisation of any of the transferred losses, at which time the transfer cannot be cancelled.

The Court’s reasons for judgment

The Court ultimately agreed with Evolution’s construction of the legislation. Jackman J concluded that Evolution did not in its 2014 tax return effectively cancel the transfer of tax losses that occurred on the acquisition of Conquest.

As a preliminary matter, Jackman J found that Evolution’s purported choice in the 2014 tax return was made in relation to the 2014 income year, and not in relation to the 2012 income year (being the joining year). Evolution’s tax returns for the 2012 and 2013 income years stated that no choice had been made to cancel the transfer. That is, Evolution expressly stated that it had not made a choice in relation to those income years.

Regarding the question of construction of s 707-145, Jackman J agreed with that proffered by Evolution. The key arguments in support of this conclusion are, in summary as follows: 

• His Honour reconciled the independent operation of s 707-145(3) with s 707-145(2). His Honour noted that s 707-145(3) operated to prevent the taxpayer from revoking that cancellation before or after lodging its tax return for that year, whereas s 707-145(2) operates “in perpetuity for that income year and all future income years as if that transfer had not occurred”.
   
• His Honour found that it was a “striking feature” of the legislative context of s 707-145 that there is no provision which expressly contemplates the ACA and available fractions being re-calculated, in the event that a choice is made to cancel a transfer under s 707-145 in relation to an income year after the joining year. To use Evolution’s language, there is no statutory mechanism by which the tax consequences of a transfer can be “unscrambled” if a decision is made in later income years to cancel the transfer.
   
• The long list of exceptions to the four-year window in which taxpayers can amend their assessments does not include a choice under s 707-145 made in later income years. Express provision for such a choice could readily have been included if it was contemplated as possible.
   
• A key purpose of the relevant legislation is to provide the head company with the choice between (a) utilising transferred losses from a joining entity, and (b) cancelling the transfer and avoiding an adjustment to the ACA and available fractions. The legislation did not intend to allow both outcomes. Evolution’s construction was consistent with that purpose, and avoided the possibility that both outcomes (or neither outcome) may arise.
   
• His Honour stated that the legislation does not support the Commissioner’s contention that a transfer of losses is “spent” or ceases to exist upon utilisation by the head company. He found that the Commissioner’s submission that a head company “waives” its right to cancel the transfer upon the losses being utilised was also not supported.

Further, his Honour was satisfied that this construction did not require reading words into s 707-145 so as to “fill a gap in the legislation”. Rather, this construction merely identified the meaning implicit in the statutory language.

His Honour also noted the “stark contrast” between the operation of s 707-120(1) as an automatic loss transfer provision in comparison to antecedent loss transfer provisions found in s 80G of the Income Tax Assessment Act 1936 (Cth) and s 170-50 of the ITAA 1997. His Honour confirmed that other legislative provisions within Part 3-90 that did not exist when s 707-145 was enacted “cannot shed light on the intended meaning of s 707-145”.

In view of these findings, Jackman J concluded that Evolution’s purported choice to cancel the transfer of the losses in its 2014 tax return was “too late to be effective under s 707-145”. The separate question was therefore answered in the negative. 

Key takeaways from Evolution Mining Limited v Commissioner of Taxation

The Federal Court’s judgment provides guidance as to the operation of s 707-145, a provision that had not previously received judicial attention. It confirms the position that a decision to cancel the automatic transfer of losses to a head company, that takes place at the joining time, can only be made in relation to the joining year. This does not mean that the choice must be made at the time of the transfer. However, it does mean that head companies should take care when deciding whether to cancel transferred losses, in order to inadvertently avoid running out of time to make such a choice.

More generally, the judgment also provides an important reminder as to the nature and importance of statutory construction. While there is nothing express in terms of applicable time limits within the wording of s 707-145, the limitations his Honour found become apparent when the provision is read in light of its broader statutory construction context. They also become apparent when considering the legislative scheme within which the provision is located, and with due regard as to the purpose that the provision seeks to achieve.

The judgment also draws attention to the fact that long-standing and well understood legislative provisions that are of fundamental importance to corporate Australia, such as the tax consolidation regime within Part 3-90, still can give rise to questions of interpretation and application. Notwithstanding that Part 3-90 was introduced some quarter of a century ago, cases such as Evolution Mining Limited v Commissioner of Taxation highlight the need to continually and carefully consider and objectively analyse key statutory provisions, in all settings and circumstances.