Deferred capital loss or deduction - asset transfer from non-resident to resident

Will a capital loss made by a non-resident company on the disposal of a CGT asset to a resident company that is a member of the same 'linked group' be disregarded by the operation of Subdivision 170-D of the Income Tax Assessment Act 1997 (ITAA 1997) if the asset has 'the necessary connection with Australia'?

Yes. Subdivision 170-D of the ITAA 1997 will apply in accordance with section 170-255 of the ITAA 1997.

The taxpayer, Company A, is a non-resident of Australia for taxation purposes.

Company S is a 51% owned subsidiary of Company A and is a resident of Australia for taxation purposes. The other 49% shareholding in Company S is owned by unrelated persons.

Company A has a controlling stake in Company S and the two companies are linked for the purposes of subsection 170-260(2) of the ITAA 1997. Company S is not a connected entity of Company A for the purposes of section 170-265 of the ITAA 1997.

Company A disposed of shares in an Australian resident private company to Company S, resulting in CGT event A1 happening for the purposes of subsection 104-10(1) of the ITAA 1997.

The shares had 'the necessary connection with Australia' for the purposes of Category 3 in section 136-25 of the ITAA 1997.

The capital proceeds were less than the share's reduced cost base at the time of the CGT event and Company A made a capital loss in accordance with subsection 104-10(4) of the ITAA 1997.

Subsection 170-255(1) of the ITAA 1997 provides that Subdivision 170-D of the ITAA 1997 will apply if: (a) an event (the deferral event ) happens involving a company (the originating company ) and another entity; and (b) one or more of the following apply: (i) the deferral event is a *CGT event that would have resulted in the originating company making a *capital loss (except a capital loss that would be disregarded under a provision of this Act other than this Subdivision); (ii) ...; (iii) ...; and (c) if subparagraph (b)(i) applies -- the CGT event is one of the following: (i) CGT events A1 and B1 (a disposal case ); (ii) CGT events D1, D2, D3 and F1 (a creation case ); and (d) one of the following applies: (i) ...; (ii) ...; (iii) if the deferral event is a CGT event A1, B1 or F1 -- the asset or the subject of the lease, as the case may be, had the *necessary connection with Australia immediately before the deferral event; (iv) ...; (v) ...; and (e) at the time of the deferral event, the originating company is a member of a *linked group and one of the following applies: (i) the other entity is a company that is not a connected entity of the originating company and is a member of that linked group; (ii) ...; (iii) ... * denotes a term defined in section 995-1 of the ITAA 1997.

For Subdivision 170-D of the ITAA 1997 to apply, paragraphs 170-255(1)(a) to (e) of the ITAA 1997 must all apply.

The disposal by Company A of its Australian shareholding to Company S is a deferral event for the purposes of paragraph 170-255(1)(a) of the ITAA 1997.

Section 136-10 of the ITAA 1997 provides that a capital gain or a capital loss is made where CGT event A1 happens to an asset that has 'the necessary connection with Australia'. Therefore, the deferral event was a CGT event that would have resulted in Company A making a capital loss for the purposes of subparagraph 170-255(1)(b)(i) of the ITAA 1997.

The disposal by Company A of its Australian shareholding to Company S results in CGT event A1 happening for the purposes of subparagraph 170-255(1)(c)(i) of the ITAA 1997.

The deferral event is a CGT event A1 and the asset had 'the necessary connection with Australia' immediately before the deferral event for the purposes of subparagraph 170-255(1)(d)(iii) of the ITAA 1997.

At the time of the deferral event, Company A was a member of a linked group and Company S was not a connected entity of Company A but was a member of that linked group for the purpose of subparagraph 170-255(1)(e)(i) of the ITAA 1997.

As each of paragraphs 170-255(1)(a) to (e) of the ITAA 1997 apply then section 170-270 of Subdivision 170-D of the ITAA 1997 applies to disregard the relevant capital loss.