Issue
Is a written agreement, under section 170-50 of the Income Tax Assessment Act 1997 (ITAA 1997) to transfer a tax loss invalid, where the income company is later found to have derived a lesser amount of ordinary income and as a result a greater amount of assessable net capital gain in the deduction year?
Decision
No. A tax loss transferred to an income company under Subdivision 170-A of the ITAA 1997 is deductible against an income company's assessable income including net capital gains.
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 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 of ordinary income for the purposes of section 6-5 of the ITAA 1997.
Company G had no net exempt income in the deduction year.
After the loss transfers Company G revised the computation of its $10,000 taxable income for the deduction year such that it now comprised $7,000 assessable net capital gain and $3,000 other net assessable income.
Reasons for Decision
Subsection 170-15(1) of the ITAA 1997 provides that Company G is taken to have incurred the amount of transferred tax loss in the loss year.
Subsection 170-20(1) states that: If an amount of a *tax loss is transferred, the *income company can deduct the amount in accordance with section 36-17 (which is about how to deduct a tax loss), but only for the income year of the income company for which the amount is transferred. That income year is called the deduction year. Note: * denotes a term defined in section 995-1 of the ITAA 1997.
As Company G derived no net exempt income in the deduction year, the tax loss transferred to Company G is deductible in the deduction year under subsection 36-17(2) of the ITAA 1997 which states that: If the entity's total assessable income for the later income year exceeds the entity's total deductions (except *tax losses), the entity is to deduct from that excess so much of the tax loss as the entity chooses. The entity may choose a nil amount.
Section 102-5 of the ITAA 1997 provides that assessable income includes net capital gain for the income year.
Therefore the transferred tax loss is deductible to the income company as against not only its other net assessable income but also against its assessable net capital gain.
Accordingly, the fact that Company G has revised the calculation of the respective proportions of net capital gain and other net assessable income included in its taxable income has no effect on the validity of the written agreements to transfer $6,000 of tax loss and $4,000 net capital loss to Company G. Note: As explained in Taxation Ruling TR98/12 it is not possible to revoke a valid written agreement to transfer a tax loss. Therefore, Company G cannot enter into a further written agreement under section 170-150 of the ITAA 1997 to transfer an additional $3,000 of net capital losses to be applied against the $7,000 of net capital gains included in its $10,000 taxable income.