Group company loss transfer - company not in existence, dormant company.

In determining whether or not two companies are members of the same wholly owned group for the purpose of a tax loss transfer in terms of Subdivision 170-A of the Income Tax Assessment Act 1997 (ITAA 1997), does subsection 975-100(2) of the ITAA 1997, subsequent to the repeal of the definition of 'dormant' in the Corporations Law, allow a company that is incorporated, and not dissolved, to be treated as being not in existence?

Yes. For the purposes of determining whether a loss transfer agreement can be made in terms of Subdivision 170-A of the ITAA 1997, a company that is incorporated and not dissolved will be treated as not being in existence during the period from its incorporation until another company acquires all of its shares from its members, providing all the conditions of being dormant previously contained in the repealed section 62 of the Corporations Law are satisfied for the whole of that period.

Company C was incorporated in 1998 and it became a member of a wholly owned group during the 2001 income year when all its shares were acquired from the original shareholder by Company A.

From the time of incorporation until its acquisition by Company A, Company C was inactive.

In the 2001 year Company C derived income and the group sought to transfer a 2001 year loss from another group company on the basis that under subsection 975-100(2) of the ITAA 1997 Company C was not in existence until it was acquired by Company A

All the other conditions in Division 170 had been satisfied.

Subsection 975-100(2) of the ITAA 1997 is the equivalent to section 80G(5A) of the Income Tax Assessment Act 1936 (ITAA 1936). Section 80G(5A) was specifically introduced by Taxation Laws Amendment Act 1988 to ensure shelf companies were not disadvantaged by the loss transfer rules which required a company to belong to the same wholly owned group for its entire period of existence throughout the loss, deduction and any intervening years. This was achieved by treating a shelf company as not being in existence during the period from its incorporation until another company acquires all of its shares from its members, provided during this time the shelf company was 'dormant' within the meaning of the Corporations Law. At the time this amendment was introduced, whether a company was "dormant" or not was determined by section 62 of the Corporations Law.

Section 62 of the Corporations Law has since been repealed. To ensure that for loss transfer purposes shelf companies are not disadvantaged by the removal of the dormant provisions from the Corporations Law, the Commissioner will continue to treat a company as not being in existence, provided all the dormant conditions previously contained in section 62 of the Corporations Law and set below are satisfied:

During the period from its incorporation until another company acquired all of its shares from its members, the company: (a) did not receive or become entitled to any income or incur or become liable for any expenditure; and (b) did not purchase, sell or supply any goods or other property, or any services, or enter into any agreement or pass any resolution in relation to the purchase, sale or supply of goods or other property, or services; and (c) did not issue, sell, purchase or make available any securities, or enter into any agreement or pass any resolution in relation to the issue, sale, purchase or making available of securities; and (d) did not issue a prospectus or statement, or enter into any agreement or pass any resolution in relation to the issue of a prospectus or statement, in connection with the issue, sale, purchase or making available, or the proposed issue, sale, purchase or making available, of any securities; and (e) did not take part in any research, development or exploration activities, or enter into any agreement or pass any resolution in relation to taking part in research, development or exploration activities; and (f) was not, and did not become a party to any lease, franchise, joint venture or partnership arrangement and did not take part in any lease, franchise, joint venture or partnership arrangement, or enter into any agreement or pass any resolution in relation to becoming a party to, or taking part in, any lease, franchise, joint venture or partnership arrangement; and (g) did not make, receive or guarantee any loan, or enter into any agreement or pass any resolution in relation to making, receiving or guaranteeing a loan; and (h) was not, and did not become a party to any underwriting agreement and did not enter into any agreement or pass any resolution in relation to becoming a party to any underwriting agreement; and (i) did not obtain or receive a grant of any licence or other authority, or make any application or pass any resolution in relation to obtaining a licence or other authority; and (j) was not, and did not become, a party to any litigation or negotiations with any other person or body.