Group company loss transfers: transfer of net capital loss and tax loss to offset capital gain

Can a net capital loss and tax loss of the same loss company be transferred to a gain company within the same wholly-owned group, if the gain company has a capital gain for a year of income that exceeds the net capital loss and tax loss of the loss company?

Yes. Subdivisions 170-B and 170-A of the Income Tax Assessment Act 1997 (ITAA 1997) will enable effective loss transfer agreements to be made to transfer the net capital loss and tax loss respectively, provided that the conditions in those Subdivisions are met.

Two companies are Australian residents and have been members of the same wholly-owned group since their incorporation. One company ('the loss company') has a surplus prior year tax loss and net capital loss available for transfer at the end of an income year. The other company ('the gain company') made a capital gain in the same income year which exceeds the combined total of the tax loss and net capital loss of the loss company. The gain company had no other income or deductions in that year.

Subdivision 170-B of the ITAA 1997 operates to enable an effective loss transfer agreement to be made to transfer the net capital loss of the loss company to the gain company. The consequence of such a transfer is that the amount will be taken to have been a net capital loss of the gain company for the year in which the net capital loss was made by the loss company (section 170-120 of the ITAA 1997).

For the purposes of determining the net capital gain of the gain company for the income year, the capital gain made in that year is reduced by the amount of the net capital loss transferred to the gain company. The resultant net capital gain is included in the assessable income of the gain company (section 102-5 of the ITAA 1997).

As the gain company now has assessable income for the income year, an amount of tax loss can be transferred to it from the loss company pursuant to Subdivision 170-A of the ITAA 1997. The consequence of this transfer is that the amount will be taken to have been a tax loss incurred by the gain company in the year the tax loss was incurred that is, a prior year (section 170-15 of the ITAA 1997). This tax loss will be an allowable deduction to the gain company in the income year (section 36-15 and section 170-20 of the ITAA 1997).

Therefore, as the gain company has a capital gain in the income year, the net capital loss of the loss company can be transferred to the extent of that capital gain, and the tax loss can be transferred to the extent that any consequential net capital gain becomes assessable income of the gain company.