Group company loss transfers: net capital loss incurred during part of capital loss year after loss company became a member of a wholly-owned group

Can a net capital loss, incurred by a loss company during the part of the capital loss year after it became a member of a wholly-owned group, be transferred to a gain company within the same group under Subdivision 170-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. A net capital loss transfer is not permitted because the loss company was not a member of the same wholly-owned group as the gain company for the entire capital loss year, as required under subsection 170-130(2) of the ITAA 1997.

A company (the 'loss company') became a member of the same wholly-owned group as another company (the 'gain company') following the acquisition of the shares in the loss company by the holding company of the group during an income year (the 'capital loss year'). The loss company incurred a net capital loss during the part of the capital loss year after it became a member of the wholly-owned group.

As a condition for transferring a net capital loss, subsection 170-130(2) of the ITAA 1997 requires that both the loss company and the gain company must be members of the same wholly-owned group at all times during the capital loss year, the application year and intervening years when both companies were in existence. The 'capital loss year' is the income year for which a loss company makes a net capital loss that is available for transfer. The 'application year' is the income year for which the transferred net capital loss can be applied.

A company is said to be in existence, as defined in subsection 975-100(1) of the ITAA 1997, if it has been incorporated and has not been dissolved. The loss company in this case was in existence prior to becoming a member of the wholly-owned group during the capital loss year.

The loss company only became a member of the wholly-owned group part way through the capital loss year, which means that it has not satisfied the requirement that it must be a member of the same wholly-owned group as the gain company for the whole of the capital loss year. It follows that no capital loss transfer is permitted even though the net capital loss was made during the part of the capital loss year after the loss company became a member of the group.