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Does Subdivision 170 D of the Income Tax Assessment Act 1997 (ITAA 1997) apply where Company A makes a balancing adjustment loss on the disposal of a unit of plant to Company B, which is within the same wholly owned group?

Yes. Subdivision 170-D of the ITAA 1997 applies to defer the deduction for the loss made by Company A until the happening of one of the events listed in section 170-275 of the ITAA 1997 (e.g. where the plant was sold outside of the group).

Company A is a member of a wholly-owned group of Australian resident companies that includes Company B. Company A dispose of a unit of plant to company B during the income year ended 30 June 2001. The market value of the unit of plant is for $30,000. The undeducted cost of the unit at the time of sale was $50,000. As a result of the disposal, Company A has a balancing adjustment loss of $20,000.

Section 42-195 of the ITAA 1997 allows a deduction on the sale of a unit of plant where the termination value for the unit is less than its undeducted cost. However, Subdivision 170-D of the ITAA 1997 applies to defer such a deduction if the conditions in section 170-255 of the ITAA 1997 are met. The conditions relevant to the facts provided are: • There is an event (the deferral event) involving a company (the originating company), and another entity (i.e. Company B) as per paragraph 170-255(1)(a) of the ITAA 1997. • The deferral event would have resulted in the originating company (Company A) becoming entitled to a deduction in respect of the disposal of a CGT asset as per subparagraph 170-255(1)(b)(ii) of the ITAA 1997. • The originating company is a resident at the time of the deferral event. • At the time of the deferral event, the originating company is a member of a linked group and the other entity is also a member of that linked group as per subparagraph 170-255(1)(e)(i) of the ITAA 1997.

Applying these conditions to the facts:- (a) there would be an event involving a company (Company A) and another entity (Company B), namely, the sale of the item of plant; (b) this deferral event would have resulted in the originating company (Company A) becoming entitled to a deduction (a balancing adjustment deduction of $20,000) in respect of the disposal of a CGT asset (the item of plant); (c) the originating company (Company A) is a resident at the time of the deferral event; and (d) at the time of the deferral event, Company A would be a member of a linked group and the other group company also would be a member of that linked group (two members of a wholly-owned company group would fall within the definition of "linked group" under section 170-260 of the ITAA 1997).

Accordingly, the conditions for application of Subdivision 170-D of the ITAA 1997 would be met in these circumstances. The immediate consequence of the application of the Subdivision would be to disregard the relevant deduction as per section 170-270 of the ITAA 1997. In other words, the balancing adjustment deduction could not be claimed by Company A and would effectively be deferred until immediately before the happening of one of the events listed in section 170-275 of the ITAA 1997.