Consolidation - extent a tax loss is transferred from a corporate tax entity to a head company

Is the extent to which a tax loss is transferred from a corporate tax entity to a head company under subsection 707-120(1) of the Income Tax Assessment Act 1997 (ITAA 1997), determined as if a choice is made by the corporate tax entity, under section 36-17 of the ITAA 1997, to deduct the maximum amount of the tax loss that could be deducted in the trial year?

Yes. The amount of a tax loss that is transferred to the head company of a consolidated group at the joining time by a corporate tax entity is determined as if the corporate tax entity had chosen, under section 36-17 of the ITAA 1997, to deduct the maximum amount of the tax loss that could be deducted in the trial year.

A company that becomes a member of a consolidated group has a carry-forward tax loss which satisfies the relevant transfer tests in Subdivision 707-A of the ITAA 1997 for the loss in respect of the trial year.

Under subsection 707-120(1) of the ITAA 1997, the tax loss is transferred from the company to the head company of the consolidated group to the extent it could be utilised by the company for the trial year under the assumptions in that subsection. The trial year is defined in subsection 707-120(2) of the ITAA 1997 as the period ending just after the joining time and is the notional loss claim year for transfer testing purposes.

The words 'to the extent' in subsection 707-120(1) of the ITAA 1997 are interpreted to mean 'to the maximum extent'. This gives effect to an object of Subdivision 707-A of the ITAA 1997: that a loss is transferred to the head company of a consolidated group if the joining entity could have utilised the loss had it not joined the group. The company could utilise all of the tax loss if, instead of joining the consolidated group, it continued as a separate entity for income tax purposes provided it continued to satisfy the loss recoupment tests and derived sufficient income.

The assumption in paragraph 707-120(1)(b) of the ITAA 1997 is consistent with this interpretation. Paragraph 707-120(1)(b) of the ITAA 1997 assumes that utilisation of a loss for the trial year is not limited by the joining entity's income or gains for the trial year.

Under section 36-17 of the ITAA 1997, a corporate tax entity can choose the amount of a prior year tax loss it can deduct in a later year of income. The definition of a corporate tax entity in section 960-115 of the ITAA 1997 includes a company as well as certain other types of entities (for example, a corporate limited partnership).

It is inferred that the company is taken to have made the choice under section 36-17 of the ITAA 1997 to deduct all of the tax loss in the trial year. Accordingly, the amount of the tax loss that will be transferred to the head company will be the maximum amount that could have been deducted by the company in the trial year.

As a consequence, this allows the head company as the 'owner' of the tax loss to make a choice under section 36-17 of the ITAA 1997 as to how much of the transferred tax loss it will deduct from its income when it utilises the loss.