Transfer of income tax losses: wholly owned groups - non-resident holding company

Does Subdivision 170-A of the Income Tax Assessment Act 1997 (ITAA 1997) allow the transfer of tax losses between a loss company and an income company if both are wholly-owned Australian resident subsidiaries of the same non-resident holding company and the conditions for transfer in the Subdivision are otherwise satisfied?

Yes. Subdivision 170-A of the ITAA 1997 does not require the holding company to be an Australian resident company and the status of the holding company as a non-resident does not prevent the loss company and income company from being members of the same 'wholly-owned group' as defined in section 975-500.

Company A (the 'loss company') and Company B (the 'income company') are resident Australian companies in accordance with paragraph (b) of the definition of 'resident' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Neither company is a 'prescribed dual resident' as defined in subsection 6(1) of the ITAA 1936.

The loss company has been a 100% subsidiary of a non-resident holding company since 1 July 1997. The income company has been a 100% subsidiary of the same non-resident holding company since 31 March 1998.

The loss company incurred tax losses as a result of its trading activities in the 2000 and 2001 income years. The income company generated profits in the 2001 income year from its trading activities.

Subdivision 170-A of the ITAA 1997 contains a number of conditions that must be satisfied before tax losses can be transferred from a loss company to an income company.

In terms of residency, subsections 170-35(1) and 170-40(1) of the ITAA 1997 provide that the loss company and the income company must be Australian residents. However, there is no residency requirement in Subdivision 170-A of the ITAA 1997 that relates to the holding company of a loss company and an income company.

Furthermore, the status of the holding company as a non-resident does not prevent the loss company and income company from being members of the same wholly-owned group.

Section 975-500 of ITAA 1997 defines wholly-owned group as follows: 'Two companies are members of the same wholly-owned group if: (a) one of the companies is a 100 per cent subsidiary of the other company, or (b) each of the companies is a 100 per cent subsidiary of the same third company.'

Under paragraph 975-500(b), there is no requirement that the 'third' company must be a resident.

Accordingly, the tax losses incurred in the 2000 and 2001 income years by the loss company can be transferred to the income company in respect of its 2001 income year, provided the other conditions for transfer in Subdivision 170-A are satisfied.