ATO ID 2006/41: Group company loss transfers-the amount of the net capital loss specified in the written agreement
Date of decision: 7 February 2006
Year of income: Year ended 31 December 1999
Business line: Public Groups and International

Issue
Can a loss company and a gain company agree to transfer the combined amount of the net capital losses for two or more capital loss years in a written agreement entered into under section 170-150 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The amount of the net capital loss that must be specified in a written agreement pursuant to paragraph 170-150(2)(b) of the ITAA 1997 is the net capital loss that is worked out for the one capital loss year only, and cannot be the combined amount of the net capital losses that is worked out for two or more capital loss years.

Facts
Loss Company and Gain Company are both members of the same wholly-owned group at all relevant times within section 170-130 of the ITAA 1997. Loss Company makes a net capital loss for an income year (the first capital loss year) and a further net capital loss for a later income year (the second capital loss year). Loss Company wishes to transfer the net capital losses for both the first capital loss year and the second capital loss year to Gain Company in the application year. The application year does not start after 30 June 2003. Loss Company and Gain Company enter into a written agreement for the transfer of a net capital loss in the application year purportedly pursuant to section 170-150 of the ITAA 1997. The amount of the net capital loss specified in the written agreement is the combined amount of the net capital losses for the first capital loss year and the second capital loss year.

Reasons for decision
Summary: Subsection 170-150(2) of the ITAA 1997 lists the conditions for a valid written agreement to transfer a net capital loss. Paragraph 170-150(2)(b) of the ITAA 1997 states that a written agreement must specify the amount of the net capital loss being transferred. Section 995-1 of the ITAA 1997 defines 'net capital loss' as having the meaning given by sections 102-10 of the ITAA 1997 and 165-114 of the ITAA 1997 and affected by section 701-30 of the ITAA 1997. Both section 102-10 and section 165-114 of the ITAA 1997 refer to the working out of a net capital loss for the income year. Therefore, from the definition of 'net capital loss', it follows that the amount of the net capital loss that must be specified in a written agreement is the net capital loss that is worked out for the one capital loss year only, and not the combined amount of the net capital losses that is worked out for two or more capital loss years.

Legislative references: Income Tax Assessment Act 1997 section 102-10 section 165-114 section 170-130 section 170-150 subsection 170-150(2) paragraph 170-150(2)(b) section 701-30 section 995-1
Subject references: Capital gains tax Capital losses Net capital losses Group company loss transfers