Group company loss transfers: wholly-owned group test

Will two companies be members of the same wholly-owned group during the whole of the period specified in subsection 170-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) if they satisfy the test in paragraph (b) of section 975-500 of the ITAA 1997 for part of that period, and satisfy the test in paragraph (a) of section 975-500 for the remainder of the period?

Yes. Two companies will be members of the same wholly-owned group during the whole of the period specified in subsection 170-30(2) of the ITAA 1997 if both are subsidiaries of a particular third company at all times during part of that period (in terms of paragraph (b) of section 975-500 of the ITAA 1997) and one is a subsidiary of the other for the remainder of the period (in terms of paragraph (a) of section 975-500 of the ITAA 1997).

Loss Company made a tax loss in Year 1. Income Company derived assessable income in Year 2. Loss Company and Income Company were direct 100% subsidiaries of Holding Company from before the commencement of Year 1 until a point of time during Year 2 when Holding Company transferred all of its shares in Income Company to Loss Company.

At a later time during Year 2, Holding Company transferred its shares in Loss Company to New Holding Company. However, Income Company remained a 100% subsidiary of Loss Company until after the end of Year 2.

Section 975-500 of the ITAA 1997, in terms of its tests in paragraphs (a) and (b), provides two bases upon which two companies can be taken to be members of the same wholly-owned group. One involves two companies, namely the loss company and the income company. The other involves three companies, namely the loss company, the income company, and the third company as parent.

Subsection 170-30(2) of the ITAA 1997 provides that, for the purpose of transferring a tax loss, two companies must be members of the same wholly-owned group at all times during the period spanning the loss year, the deduction year and any intervening year. As section 975-500 of the ITAA 1997 provides two bases upon which the two companies can be taken to be members of the same wholly-group group, it follows that if one of those bases is satisfied for part of the period specified in subsection 170-30(2) of the ITAA 1997 and the other is satisfied for the remainder of the period, then the companies will be members of the same wholly-owned group at all times during that period.

There is no limitation under subsection 170-30(2) or section 975-500 of the ITAA 1997 to the effect that a loss company and an income company can only be members of the same wholly-owned group for the whole of the period specified in subsection 170-30(2) if they satisfy one basis for grouping (paragraph 975-500(a) of the ITAA 1997) for the whole of the relevant period or the other basis (paragraph 975-500(b) of the ITAA 1997) for the whole of the relevant period .

Therefore, Loss Company may transfer its loss in respect of Year 1 to Income Company in respect of its Year 2 if both companies satisfy the conditions for transfer in Subdivision 170-A of the ITAA 1997. The conditions include sections 170-35 and 170-40 of the ITAA 1997 which will require both companies to satisfy the same business test as a result of the sale of the shares in Loss Company to New Holding Company.