Tax Law Improvement Act (No. 1) 1998 (46 of 1998)
Schedule 1 Amendment of the Income Tax Assessment Act 1997
4 Section 170-70 (link note)
Repeal the link note, substitute:
Subdivision 170-B - Transfer of net capital losses within wholly-owned groups of companies
Guide to Subdivision 170-B
170-101 What this Subdivision is about
A company can transfer a surplus amount of its net capital loss to another company so that the other company can apply the amount in working out its net capital gain for the income year of the transfer. Both companies must be members of the same wholly-owned group.
Table of sections
170-105 Basic principles for transferring a net capital loss
Effect of transferring a net capital loss
170-110 When a company can transfer a net capital loss
170-115 Who can apply transferred loss
170-120 Gain company is taken to have made transferred loss
170-125 Tax treatment of consideration for transferred tax loss
Conditions for transfer
170-130 Companies must be in existence and members of the same wholly-owned group
170-135 The loss company
170-140 The gain company
170-145 Maximum amount that can be transferred
170-150 Transfer by written agreement
170-155 Losses must be transferred in order they are made
170-160 Gain company cannot transfer transferred net capital loss
Effect of agreement to transfer more than can be transferred
170-165 Agreement transfers as much as can be transferred
170-170 Amendment of assessments
Effect of transfer on cost base of equity or debt interest held by company in the same wholly-owned group
170-175 Direct and indirect interests in the loss company
170-180 Direct and indirect interests in the gain company
[This is the end of the Guide.]
170-105 Basic principles for transferring a net capital loss
(1) A company can transfer a net capital loss (except a net capital loss from collectables) to another company so that the other company can apply it in working out its net capital gain for the income year of the transfer.
(2) Both companies must be members of the same wholly-owned group. There are other eligibility requirements that they must also satisfy.
(3) The transferred loss must be "surplus" in the sense that, for the income year of the transfer, the transferring company does not have enough capital gains against which to apply it. The other company must have enough capital gains against which to apply it.
(4) Also, it must not exceed the total cost bases (without indexation) of equity and debt interests in the loss company held by companies in the same wholly-owned group, unless the other company is a 100% subsidiary of the loss company.
(5) Neither company must be prevented by Subdivision 165-CA or 175-CA from applying the loss in working out its net capital gain for the income year of the transfer.
Note: Subdivision 165-CA deals with the consequences of changing ownership or control of a company. Subdivision 175-CA deals with using a company's net capital losses to avoid income tax.
(6) The net capital loss is transferred by an agreement between the 2 companies.
(7) The net capital loss can be transferred in the same year as it is made. In that case different rules apply.
Effect of transferring a net capital loss
170-110 When a company can transfer a net capital loss
(1) A company (the loss company) can transfer an amount of its *net capital loss for an income year (the capital loss year) to another company (the gain company) if the conditions in this Subdivision are met.
(2) The amount transferred can be the whole or part of the *net capital loss.
Note: A PDF cannot transfer a net capital loss, except one for a period before it became a PDF: see section 195-30 of the Income Tax Assessment Act 1997.
170-115 Who can apply transferred loss
(1) If an amount of a *net capital loss is transferred, the gain company can apply the amount in working out its *net capital gain, but only for the income year of the gain company for which the amount is transferred. That income year is called the application year.
Note: A company's net capital gain or net capital loss for an income year is usually worked out under section 102-5.
(2) The loss company can no longer apply the transferred amount and is taken not to have made the *net capital loss to the extent of that amount.
170-120 Gain company is taken to have made transferred loss
(1) If an amount of a *net capital loss is transferred, the amount is taken to be a *net capital loss of the gain company for the capital loss year.
(2) However, if the capital loss year is the same as the application year, the amount is taken to be a *capital loss of the gain company for the application year.
170-125 Tax treatment of consideration for transferred tax loss
(1) If the loss company receives consideration from the gain company for the transferred amount:
(a) the consideration is neither assessable income nor exempt income of the loss company; and
(b) the loss company does not make a *capital gain because of receiving the consideration.
Note: However, the consideration may affect how section 170-175 modifies the cost base of direct and indirect interests in the loss company.
(2) If the gain company gives consideration to the loss company for the transferred amount:
(a) the gain company cannot deduct the consideration; and
(b) the gain company does not make a *capital loss because of giving the consideration.
Note: However, the consideration may affect how section 170-175 modifies the cost base of direct and indirect interests in the gain company.
Conditions for transfer
170-130 Companies must be in existence and members of the same wholly-owned group
(1) Both companies must be *in existence during at least part of each of the following income years:
(a) the capital loss year; and
(b) the application year; and
(c) any intervening income year.
(2) Also, both companies must be members of the same *wholly-owned group at all times during those income years when both companies were *in existence.
170-135 The loss company
(1) The loss company:
(a) must be an Australian resident throughout the capital loss year; and
(b) must not be a *dual resident investment company in either the capital loss year or the application year.
(2) It must be the case that the loss company was not required to calculate the *net capital loss:
(a) under section 165-114 (because of a change in ownership or control); or
(b) under section 175-75 (because of an injected capital gain or loss).
(3) Also, it must be the case that neither Subdivision 165-CA nor Subdivision 175-CA would have prevented the loss company from applying the *net capital loss in working out its *net capital gain for the application year if it had made enough capital gains in that year.
Note 1: Subdivision 165-CA deals with the consequences of changing ownership or control of a company. Subdivision 175-CA deals with using a company's net capital losses to avoid income tax.
Note 2: A company's net capital gain or net capital loss for an income year is usually worked out under section 102-5.
170-140 The gain company
(1) The gain company must be an Australian resident throughout the application year.
(2) If the capital loss year and the application year are not the same, the gain company must not be prevented by Subdivision 165-CA or 175-CA from applying the transferred amount in working out its *net capital gain for the application year.
Note 1: Subdivision 165-CA deals with the consequences of changing ownership or control of a company. Subdivision 175-CA deals with using a company's net capital losses to avoid income tax.
Note 2: A company's net capital gain or net capital loss for an income year is usually worked out under section 102-5.
(3) If the capital loss year and the application year are the same, it must be the case that the gain company was not required to calculate its own *net capital gain or *net capital loss for the application year:
(a) under Subdivision 165-CB (because of a change in ownership or control); or
(b) under section 175-75 (because of an injected capital gain or loss).
Note: In deciding whether paragraph (b) applies, remember that the transferred amount is taken to be a capital loss of the gain company for the application year (because of subsection 170-120(2)).
170-145 Maximum amount that can be transferred
Loss company can only transfer what it cannot use itself
(1) The amount transferred cannot exceed the amount of the loss company's *net capital loss that, apart from the transfer, the loss company would carry forward to the next income year after the application year.
Note: If the capital loss year and the application year are the same, the loss company would carry forward the whole of the net capital loss, because section 102-5 does not allow a net capital loss to be applied in the income year in which it was made.
Example: In the application year the loss company has:
a net capital loss from an earlier income year of $25,000; and
other capital losses totalling $10,000; and
capital gains totalling $20,000;
Of the $25,000 loss, the loss company can transfer to the gain company no more than:
$25,000 - ($20,000 - $10,000) = $15,000
Transferred loss must not exceed total cost bases of equity and debt interests in the loss company held by companies in the same wholly-owned group
(2) The amount transferred also cannot exceed the total of the respective *cost bases at the end of the application year (excluding indexation) of:
(a) each *share in the loss company that is held at the end of the application year by a company that:
(i) was a member of the same *wholly-owned group as the loss company throughout the application year (disregarding a period when either was not *in existence); and
(ii) *acquired the share on or after 20 September 1985; and
(b) each debt that the loss company owes at the end of the application year, for money it *borrowed, to a company that:
(i) was a member of the same *wholly-owned group as the loss company throughout the application year (disregarding a period when either was not *in existence); and
(ii) *acquired the debt on or after 20 September 1985.
(3) No amount can be transferred if there is no such share or debt.
(4) Subsections (2) and (3) do not apply if the gain company is a *100% subsidiary of the loss company throughout the application year (disregarding a period when either was not *in existence).
Transferred loss must not exceed what the gain company can use
(5) No amount can be transferred if, apart from the operation of this section, the gain company would not have a *net capital gain for the application year.
(6) The amount transferred also cannot exceed the amount worked out as follows:
Method statement
Step 1. Work out what, apart from the operation of this section, would have been the gain company's *net capital gain for the application year.
Step 2. Subtract each amount that:
(a) the gain company can apply under section 170-115 in working out its *net capital gain for the application year; and
(b) was transferred to the gain company (by the loss company or any other company) by an agreement made before the agreement by which the first amount is transferred.
Example: In the application year:
? the gain company has capital gains totalling $60,000 and capital losses totalling $25,000; and
? another company, being a member of the same wholly-owned group as the gain company, transferred a net capital loss of $15,000 to the gain company; and
? the loss company incurred a net capital loss of $50,000.
Of the $50,000 loss, the loss company can transfer to the gain company no more than:
$60,000 - $25,000 - $15,000 = $20,000
170-150 Transfer by written agreement
(1) The transfer must be made by a written agreement between the loss company and the gain company.
(2) The agreement must:
(a) specify the income year of the transfer (which may be earlier than the income year in which the agreement is made); and
(b) specify the amount of the *net capital loss being transferred; and
(c) be signed by the public officer of each company; and
(d) be made on or before the day of lodgment of the gain company's *income tax return for the application year, or within such further time as the Commissioner allows.
Note: The agreement will usually be made in the next income year after the one for which the gain company will apply the loss.
170-155 Losses must be transferred in order they are made
If the loss company has 2 or more *net capital losses that it can transfer in the application year, it can transfer them only in the order in which it made them.
170-160 Gain company cannot transfer transferred net capital loss
The gain company cannot transfer an amount of a *net capital loss transferred to it, or any part of the amount.
Effect of agreement to transfer more than can be transferred
170-165 Agreement transfers as much as can be transferred
(1) If the amount specified in an agreement exceeds the maximum amount that the loss company can transfer to the gain company in the application year, only that maximum amount is taken to have been transferred.
(2) One reason why an agreement might specify more than can be transferred is that an assessment has been amended since the agreement.
170-170 Amendment of assessments
The Commissioner may amend an assessment to *disallow a transferred amount of a *net capital loss:
(a) if the agreement to transfer the net capital loss is ineffective because the loss company did not actually make the loss; or
(b) to the extent that section 170-165 reduces the transferred amount because the loss company did not actually make some of it.
The Commissioner may do so despite section 170 (Amendment of assessments) of the Income Tax Assessment Act 1936.
Effect of transfer on cost base of equity or debt interest held by company in the same wholly-owned group
170-175 Direct and indirect interests in the loss company
(1) If:
(a) an amount of a *net capital loss is transferred; and
(b) a company (the group company) holds a *share in the loss company or is owed a debt by it in respect of a loan; and
(c) the group company *acquired the share or debt on or after 20 September 1985; and
(d) throughout the application year, the group company is a member of the same *wholly-owned group as the loss company (disregarding a period when either was not *in existence);
the *cost base and *reduced cost base of the share or debt are reduced by an amount that is appropriate having regard to:
(e) any consideration received by the loss company for the transferred amount; and
(f) the group company's direct or indirect interest in the loss company.
Note: Reductions under subsection 160ZP(13) of the Income Tax Assessment Act 1936 are also relevant: see section 170-175 of the Income Tax (Transitional Provisions) Act 1997.
(2) If:
(a) an amount of a *net capital loss is transferred; and
(b) a company (the group company) holds a *share in another company, or is owed a debt by it in respect of a loan; and
(c) the group company *acquired the share or debt on or after 20 September 1985; and
(d) the money the group company paid for the share, or the borrowed money, has been applied (directly, or indirectly through one or more interposed entities):
(i) in the other company or a third company acquiring shares in the loss company; or
(ii) in a *borrowing by the loss company from the other company or from a third company; and
(e) throughout the application year, the group company, the other company and the third company (if any) are all members of the same *wholly-owned group as the loss company (disregarding, for a particular company, a period when it was not *in existence);
the *cost base and *reduced cost base of the share or debt are reduced by an amount that is appropriate having regard to:
(f) any consideration received by the loss company for the transferred amount; and
(g) the group company's direct or indirect interest in the loss company.
170-180 Direct and indirect interests in the gain company
(1) If:
(a) an amount of a *net capital loss is transferred; and
(b) a company (the group company) holds a *share in the gain company or is owed a debt by it in respect of a loan; and
(c) the group company *acquired the share or debt on or after 20 September 1985; and
(d) throughout the application year, the group company is a member of the same *wholly-owned group as the gain company (disregarding a period when either was not *in existence);
the *cost base and *reduced cost base of the share or debt are increased (see subsection (3)).
Note: Increases under subsections 160ZP(14) and (15) of the Income Tax Assessment Act 1936 are also relevant: see section 170-180 of the Income Tax (Transitional Provisions) Act 1997.
(2) If:
(a) an amount of a *net capital loss is transferred; and
(b) a company (the group company) holds a *share in another company, or is owed a debt by it in respect of a loan; and
(c) the group company *acquired the share or debt on or after 20 September 1985; and
(d) the money the group company paid for the share, or the borrowed money, has been applied (directly, or indirectly through one or more interposed entities):
(i) in the other company or a third company acquiring shares in the gain company; or
(ii) in a *borrowing by the gain company from the other company or from a third company; and
(e) throughout the application year, the group company, the other company and the third company (if any) are all members of the same *wholly-owned group as the gain company (disregarding, for a particular company, a period when it was not *in existence);
the *cost base and *reduced cost base of the share or debt are increased.
(3) The *cost base and *reduced cost base are increased by an amount that is appropriate having regard to:
(a) any consideration given by the gain company for the transferred amount; and
(b) the group company's direct or indirect interest in the gain company.
Note: This is because the consideration may be less than the commercial value of the transferred net capital loss.
(4) However, the increase cannot exceed the increase in the market value of the *share or debt that results from the amount of the *net capital loss being transferred. (If no increase in that market value results, the *cost base and *reduced cost base are not increased either.)
Note: This Subdivision is disregarded in calculating the attributable income of a CFC: see section 410 of the Income Tax Assessment Act 1936.
[The next Division is Division 175.]