INTM561300 - Hybrids: allocation of DII within a group: allocation of DII surplus

Company B can make a claim (an allocation claim) for all or part of Company A’s unused DII surplus for the overlapping period if the following requirements are met

Requirement 1

  • Company A consents to the allocation claim

Requirement 2

  • Company B identifies the amount of DII surplus being claimed in its allocation claim

Requirement 3

  • Company B has other ordinary income for the shortfall period (matchable income) that is not itself DII, and it is equal to or exceeds the DII surplus being claimed

Requirement 4

  • The allocation claim identifies the amount of matchable income

Requirement 5

  • The amount of matchable income is equal to the DII surplus being claimed and does not exceed the unused part of the DII shortfall for the period

Example

During its surplus period Company A has DII surplus of 60, all of which is unused.

During its shortfall period Company B has DII shortfall of 40, all of which is unused. It also has ordinary income of 50, none of which is dual inclusion income.

Assuming Company A consents to any allocation claim, requirement 1 is met.

Company B identifies 40 of DII surplus belonging to Company A in its claim. Requirement 2 is met.

Company B’s matchable income is 50 as this is the amount of ordinary income that is not dual inclusion income and is equal to or exceeds the DII surplus of 40 to which the allocation claim relates. Requirement 3 is met.

Assuming Company B identifies the amount of matchable income relating to the allocation claim, requirement 4 is met.

The amount of matchable income identified is 40 as this must equal the amount of DII surplus being claimed. As it does not exceed the unused DII surplus amount of 60, requirement 5 is met.

For the procedure on making a claim for allocation of surplus DII, see Part 8A, Schedule 18, FA 1998.

Effect of the allocation claim

Company A’s dual inclusion income is reduced by the amount of matchable income to which the allocation claim relates.

The characteristics of the dual inclusion income in Company A that made it dual inclusion income in the first place are now impressed on the matched amount of Company B’s income, but everything else in relation to that amount of income is unchanged.

So, Company B must treat the matched amount of its income (the subject of the allocation claim) as having characteristics which caused it to be regarded as dual inclusion income by Company A under the provisions of a relevant chapter of Part 6A.

This ensures that amounts deductible in two jurisdictions can only be set against income included in the same two jurisdictions.