Group company loss transfers: net capital loss of loss company - assessable income of income company

Can a loss company effectively transfer amounts of surplus prior year net capital losses to an income company to be applied against assessable income, as opposed to application in working out a net capital gain?

No. Subsections 170-145(5) and 102-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997) operate to deny a deduction from assessable income of a net capital loss for any income year.

Two Australian resident companies are members of the same wholly-owned group. One company (loss company) has surplus prior year net capital losses available for transfer in respect of an income year. The other company (income company) has made a net capital loss in that year and has ordinary assessable income that exceeds the amount of its net capital losses.

Section 170-145 of the ITAA 1997 determines the maximum amount of net capital loss that can be transferred between group companies.

Pursuant to subsection 170-145(5) of the ITAA 1997, no amount of net capital loss can be transferred from the loss company to the income company if, apart from the operation of Subdivision 170-B of the ITAA 1997, the income company would not have a net capital gain for the income year. As the income company has no net capital gain for the income year, it follows that no amount of net capital loss can be transferred to the income company to be claimed as a deduction against assessable income.

Furthermore, the net capital losses of the income company cannot be claimed as deductions against its assessable income for any income year (subsection 102-10(2) of the ITAA1997).