Issue
Can a loss company transfer a tax loss to an income company under Subdivision 170-A of the Income Tax Assessment Act 1997 (ITAA 1997) if both companies were in existence at all times during the period from the beginning of the loss year to the end of the deduction year, but were not members of the same wholly-owned group at all times during that period ?
Decision
No. Subsection 170-30(2) of the ITAA 1997 requires both companies to be members of the same wholly-owned group for the entire period from the beginning of the loss year to the end of the deduction year.
Facts
A loss company incurred a tax loss in an income year (the 'loss year'). An income company derived assessable income in a later income year (the 'deduction year'). The loss company and income company became members of the same wholly-owned group during the loss year and remained members of that group until after the end of the deduction year.
Reasons for Decision
Section 170-30 of the ITAA 1997 sets some of the conditions for the transfer of tax losses under Subdivision 170-A of the ITAA 1997. Subsection 170-30(1) of the ITAA 1997 requires both companies to be in existence during at least part of each of the loss year, the deduction year and any intervening years. Subsection 170-30(2) of the ITAA 1997 states that both companies must also be members of the same wholly-owned group 'during the whole or part of those years when both companies were in existence'.
The reference in subsection 170-30(2) of the ITAA 1997 to 'or part of those years' refers only to a situation where a company was not in existence during part of one or more of the relevant years. Where a loss company and income company were in existence for the entire period from the beginning of the loss year to the end of the deduction year, the requirement is that they must be members of the same wholly-owned group during the whole of those years.
The Explanatory Memorandum to the Income Tax Assessment Bill 1996 clarifies the meaning of subsection 170-30(2) of the ITAA 1997 when it states (in the summary of the new law) the general rule in respect of loss transfers:- A resident company with a tax loss can transfer it to another resident company if the companies are members of the same wholly-owned group at all times during : the income year in which the loss was incurred; the income year for which the tax loss is transferred; and any intervening income year.' [emphasis in bold added]
Accordingly, in the circumstances described above, the tax loss incurred by the loss company in the loss year cannot be transferred to the income company in respect of the deduction year because the companies were not members of the same wholly-owned group during the whole of the loss year.