Group company loss transfers: wholly owned groups - when loss company and gain company must be Australian residents

To transfer a net capital loss pursuant to Subdivision 170-B of the Income Tax Assessment Act 1997 (ITAA 1997), is it necessary that the loss company must be an Australian resident throughout the loss year, and further, that the gain company must be an Australian resident throughout the application year?

Yes. Both the loss and gain companies must be Australian residents in accordance with paragraph 170-135(1)(a) and subsection 170-140(1) of the ITAA 1997 respectively.

A holding company (the loss company) is wholly-owned by non-resident entities and has a prior year net capital loss. A 100% subsidiary (the gain company) of the holding company made a net capital gain in an income year (the application year) that exceeds the amount of net capital loss available to the loss company. Both companies were incorporated in Australia before the commencement of the capital loss year and remained so throughout the period to the end of the application year.

Subdivision 170-B of the ITAA 1997 contains a number of conditions that must be satisfied before net capital losses can be transferred from a loss company to a gain company. Specifically, paragraph 170-135(1)(a) and subsection 170-140(1) of the ITAA 1997 provide that the loss company and the gain company must be Australian residents throughout the capital loss year and the application year respectively.

There is no requirement that the underlying beneficial owners of the companies that form a wholly-owned group must be Australian residents. The definition of 'resident' in subsection 6(1) of the Income Tax Assessment Act 1936 extends to companies that are incorporated in Australia. Accordingly, as both companies were incorporated in Australia before the commencement of the capital loss year and remained so throughout the application year, they satisfy the residency requirements of paragraph 170-135(1)(a) and subsection 170-140(1) of the ITAA 1997 as outlined.

The loss company can therefore transfer the net capital loss to the gain company provided all other conditions for transfer in Subdivision 170-B of the ITAA 1997 are met.