ATO Interpretative Decision

ATO ID 2004/386

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can the Commissioner exercise the discretion pursuant to paragraph 170-50(2)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) to grant further time for the creation of an agreement to transfer an additional amount of tax loss from a loss company to an income company, if the loss company has been de-registered since making the original loss transfer agreement with the income company?

Decision

No. The Commissioner does not have the capacity to exercise the discretion pursuant to paragraph 170-50(2)(d) of the ITAA 1997 in this manner.

Facts

Loss Company incurred a tax loss in an income year. It transferred part of the tax loss to Income Company 1 and the remainder to Income Company 2 in respect of that year. Loss Company was de-registered during the following year.

A determination was subsequently made that the assessable income of Income Company 1 for the income year should be reduced. The effect of the determination was that the tax loss transferred to Income Company 1 exceeded the maximum amount that Income Company 1 could use in the income year. Pursuant to section 170-65 of the ITAA 1997, only that maximum amount would be taken to have been transferred under the agreement between Loss Company and Income Company 1.

As a result, Income Company 2 requested the Commissioner to exercise his discretion under paragraph 170-50(2)(d) of the ITAA 1997 to allow further time for modification of the original agreement between Loss Company and Income Company 2, or the creation of a new agreement, to allow the amount that could not be used by Income Company 1 to be transferred to Income Company 2.

Reasons for Decision

Where section 170-65 of the ITAA 1997 deems the transfer of a lesser amount of tax loss than the amount specified in an agreement between a loss company and income company, it generally will be the case that the excess amount becomes available for utilisation by the loss company. In such circumstances, one option for the loss company may be to make a further transfer to a second income company with which it has already made an agreement for an income year. Taxation Determination TD 2003/23 states that this further transfer necessarily represents a separate, additional agreement rather than a modification of the original agreement. If the second income company has already lodged its income tax return for the income year, a favourable exercise of the Commissioner's discretion pursuant to paragraph 170-50(2)(d) of the ITAA 1997 will be required before the additional agreement can be made.

In this regard, it is relevant to note that paragraph 170-50(2)(d) of the ITAA 1997 only gives power to the Commissioner to allow further time to make a loss transfer. It does not give power to the Commissioner to waive other requirements under the law. These requirements include the existence of a loss company with an available tax loss, the existence of an income company with assessable income, and an agreement by both companies made in writing and signed by the public officer of each company (section 170-50 of the ITAA 1997). Hence, a favourable exercise of the discretion to allow further time pursuant to paragraph 170-50(2)(d) of the ITAA 1997 will be of no benefit where the fundamental conditions for making a valid loss transfer cannot be satisfied.

In the circumstances described above, as Loss Company has been de-registered and is no longer in existence, there is no capacity to enter into an agreement to transfer the amount of tax loss that could not be used by Income Company 1. The conditions for making a valid tax loss transfer cannot be satisfied.

Year of income:  Period from 1 January 2000 to 31 December 2000

Legislative References:
Income Tax Assessment Act 1997
   subdivision 170-A
   section 170-65
   section 170-50
   paragraph 170-50(2)(d)

Related Public Rulings (including Determinations)
Taxation Determination TD 2003/23

Keywords
Group company loss transfers

Business Line:  Public Groups and International

Date of publication:  7 May 2004

ISSN: 1445-2782