ATO Interpretative Decision
ATO ID 2003/782
Income Tax
Company loss transfers: loss year and deduction year the same - application of Division 165 to income companyFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where a loss company incurs and then transfers a loss of the same income year, does the income company need to satisfy Division 165 of the Income Tax Assessment Act 1997 (ITAA 1997) from the start of the income year before the loss year in which the income company is deemed to have incurred the loss?
Decision
No. Subsection 170-40(2) of the ITAA 1997 expressly provides that Division 165 of the ITAA 1997 does not apply to the income company if the loss year and the deduction year are the same.
Facts
Loss Company incurs a loss in the current year (the loss year). The public officers of Loss Company and Income Company enter into a valid loss transfer agreement under Division 170 of the ITAA 1997 to transfer that loss.
Income Company was not a member of the same wholly owned group for the whole of the income year before the loss year. The business of Income Company was substantially changed during the income year before the loss year, consequently, Income Company does not satisfy Division 165 of the ITAA 1997 from the start of the income year before the loss year.
Reasons for Decision
Where an amount of tax loss is transferred ('the transferred amount') and the loss year and the deduction year are the same, subsection 170-15(2) of the ITAA 1997 provides that the transferred amount is deemed to be incurred by the income company in the income year immediately before the loss year.
This deeming rule in subsection 170-15(2) of the ITAA 1997 is necessary as Division 36 of the ITAA 1997 only permits the deduction of a tax loss where that loss is incurred in an 'earlier' income year.
To ensure that subsection 170-15(2) of the ITAA 1997 does not inappropriately apply Division 165 of the ITAA 1997 in respect of the deduction claimed by the income company for the transferred amount, subsection 170-40(2) of the ITAA 1997 expressly provides that Division 165 does not apply in such circumstances.
Subsection 80G(14) of the Income Tax Assessment Act 1936 (ITAA 1936) is the equivalent operative provision to subsection 170-40(2) of the ITAA 1997. The Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No. 4) 1984 stated that:
... sub-section 80G(14) will ensure that the prior year loss provisions are not brought into account inappropriately because of the mechanism for loss transfer established by sub-paragraph (6)(d)(ii) where a loss is to be transferred in the year in which it is incurred. Accordingly, in such a case, sub-section 80G(14) will effectively exclude the application of relevant prior year loss provisions to both the loss company (paragraph (a)) and the income company (paragraph (b)).
The legislative intent behind the enactment of subsection 80G(14) of the ITAA 1936 was to over-ride the deeming effect of subsection 80G(6) of the ITAA 1936. The Explanatory Memorandum to the Income Tax Assessment Bill 1996, of which Subdivision 170-A was part, signalled no change to the law with the equivalent provision subsection 170-40(2). Given the absence of any contrary legislative intention, section 1-3 of the ITAA 1997 will confer the intent of subsection 80G(14) of the ITAA 1936 upon subsection 170-40(2) of the ITAA 1997.
Date of decision: 21 July 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
subparagraph 80G(6)(d)(ii)
subsection 80G(14)
section 1-3
Division 36
Division 165
Subdivision 170-A
subsection 170-15(2)
subsection 170-40(2)
Other References:
Explanatory Memorandum to the Income Tax Assessment Bill 1996
Keywords
Companies
Group companies
Group company loss transfers
ISSN: 1445-2782