Issue
Is a written agreement, under section 170-150 of the Income Tax Assessment Act 1997 (ITAA 1997) to transfer a net capital loss invalid, where the gain company is later found to have a lesser amount of assessable net capital gain in the application year, than the amount of net capital loss transferred in that agreement?
Decision
No. Section 170-165 of the ITAA 1997 deems the written agreement to be valid to the extent of the maximum amount that the loss company can transfer to the gain company.
Facts
Company L and Company G are members of the same wholly owned group of companies at all the relevant times.
For the purposes of Subdivisions 170-A and 170-B of the ITAA 1997 Company L is a 'loss company'. Company G is an 'income company' for the purposes of Subdivision 170-A and a 'gain company' for the purposes of Subdivision 170-B of the ITAA 1997.
Company L validly entered into a written agreement pursuant to section 170-50 of the ITAA 1997 to transfer an amount of tax loss of $6,000 to Company G for the deduction year.
On the same day, Company L also entered into a written agreement pursuant to section 170-150 of the ITAA 1997 to transfer $4,000 net capital loss to Company G for an application year that was the same as the deduction year
For the relevant deduction/application year, Company G had, at the time of entering into the relevant loss transfer agreements, a taxable income of $10,000 comprising a $4,000 net capital gain and $6,000 other net assessable income.
After the loss transfers Company G revised the computation of its $10,000 taxable income, so that it was comprised of $2,000 assessable net capital gain and $8,000 other net assessable income.
Reasons for Decision
Subsection 170-165(1) of the ITAA 1997 specifies that: If the amount specified in an agreement exceeds the maximum amount that the loss company can transfer to the gain company in the application year, only that maximum amount is taken to have been transferred.
Therefore there is no need for company L and Company G to prepare another loss transfer agreement under section 170-150 of the ITAA 1997 as the agreement to transfer $4,000 net capital loss is still effective in transferring $2,000 net capital loss to Company G. Note: Unless an additional amount of tax loss of $2,000 is validly transferred to Company G from Company L or another loss company(s) under section 170-50 of the ITAA 1997, then Company G will have a taxable income of $2,000. The transfer of such an additional tax loss is dependent upon the Commissioner having allowed further time pursuant to paragraph 170-50(2)(d) of the ITAA 1997 in which to make such a transfer(s).