Issue
Can a prior year tax loss be transferred between two companies in the same wholly-owned group, pursuant to Subdivision 170-A of the Income Tax Assessment Act 1997 (ITAA 1997), if the loss company was inactive during the income year of the transfer (the 'deduction year')?
Decision
Yes. A prior year tax loss can be transferred if the loss company was inactive during the income year of the transfer (the 'deduction year') because the loss company meets the requirement of being in existence during the deduction year in accordance with subsections 170-30(1) and former subsection 975-100(1) of the ITAA 1997.
Facts
A holding company and its subsidiary company are Australian residents. The subsidiary company has been a 100 per cent subsidiary of the holding company since incorporation of the subsidiary company prior to 1 July 1998. The subsidiary had surplus carry forward tax losses at the conclusion of the income year ended 30 June 2001.
On the first day of the income year ended 30 June 2002, the holding company combined all of the activities of the subsidiary company with its own to leave the subsidiary inactive, but not in liquidation, for the remainder of that income year. The holding company made a profit in that income year.
Reasons for Decision
Subdivision 170-A of the ITAA 1997 allows for the transfer of tax losses within wholly-owned company groups if certain conditions are met.
One of the conditions for the transfer of losses is that both the loss company and the income company must be in existence during at least part of each of the loss year, the deduction year and any intervening year (subsection 170-30(1) of the ITAA 1997). The phrase 'in existence' is defined in former subsection 975-100(1) of the ITAA 1997 as follows:
A company is in existence if: (a) it has been incorporated; and (b) it has not been dissolved. Note: The repeal of section 975-100 of the ITAA 1997 was effective from 1 April 2005. It therefore applies in the income years with which this ATO ID is concerned.
Thus, the subsidiary company in this case is considered to be in existence during the deduction year since it has not been dissolved. Accordingly, the subsidiary company is able to transfer surplus tax losses to the holding company (provided the other conditions for transferring a tax loss in Subdivision 170-A are met). Note: For most companies, Division 170 of the ITAA 1997 ceased to apply in income years starting after 30 June 2003.