Issue
Can a company choose to transfer a part of a tax loss that was incurred during a part of the loss year to another company that is a member of the same wholly-owned group, pursuant to Subdivision 170-A of the Income Tax Assessment Act 1997 (ITAA 1997) as it formerly applied?
Decision
No. Section 170-10 of the ITAA 1997 permits a company to transfer the whole or part of its tax loss for the loss year to another company within the same wholly-owned group where certain conditions are met, but this does not allow the company to choose to transfer a part of the loss referable to a particular period in the loss year.
Facts
Loss Company and Income Company are both members of the same wholly-owned group at all relevant times within section 170-30 of the ITAA 1997.
Loss Company incurs a tax loss during an income year (the loss year). It wishes to transfer an amount of this tax loss to Income Company in a later income year (the deduction year) before the application of transitional rules generally phasing out the group loss transfer provisions.
Loss Company has a change of ownership in the loss year but satisfies the same business test in respect of the deduction year. Subdivision 175-A of the ITAA 1997 does not apply to Loss Company in the deduction year.
Income Company has a change of ownership in the loss year, at the same time as Loss Company, and fails the same business test in respect of the deduction year.
Loss Company seeks to transfer part of the tax loss incurred during a part of the loss year to Income Company. The part of the loss year was the period from when Income Company has a change of ownership to the end of the loss year.
Reasons for Decision
Subdivision 170-A of the ITAA 1997, as it operated for income years before the application of transitional rules generally phasing out the group loss transfer provisions, allowed a loss company to transfer a surplus amount of its tax loss to another company if certain conditions in the Subdivision are met.
Section 170-10 of the ITAA 1997 provides that a loss company can transfer an amount of its tax loss, as defined, for an income year to an income company if the conditions in Subdivision 170-A are met. The amount transferred can be the whole or part of the tax loss.
It is considered that the reference to 'or part' of the tax loss in section 170-10 reflects the fact that the loss company is not required by Subdivision 170-A to transfer the full amount of its available tax loss. It can instead agree to transfer a lesser part of that amount.
Furthermore, Subdivision 170-A does not contain any provision that provides a loss company with the right to choose that the transferred amount is in respect of any particular part(s) of the loss year.
An amount of tax loss that is transferred to an income company is deemed by subsection 170-15(1) of the ITAA 1997 to be a tax loss incurred by the income company in the loss year. That loss is not deemed to be incurred in respect of any particular part of the loss year but rather the whole of the loss year.
Subdivision 170-A contains a number of conditions that restrict the amount of tax loss that the loss company can transfer to the income company. In particular, subsection 170-40(2) of the ITAA 1997 provides that the income company must not be prevented by Division 165 or 175 of the ITAA 1997 from deducting the transferred amount.
As Income Company had a change of ownership in the loss year and was not able to satisfy the same business test in respect of the deduction year, Division 165 would prevent Income Company from deducting the transferred amount. Accordingly, Loss Company's tax loss is not available for transfer to Income company for the deduction year as subsection 170-40(2) is not satisfied.