ATO ID 2003/350: Group company loss transfers: change in ownership of holding company - income company fails to satisfy the same business test
Date of decision: 19 February 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
Can a loss company and income company make an agreement to transfer a prior year tax loss, under Subdivision 170-A of the Income Tax Assessment Act 1997 (ITAA 1997), if there was a change in majority ownership of their holding company, followed by a change in the business of the income company, during the deduction year?

Decision
No. Any agreement made by the two companies to transfer the prior year tax loss will be ineffective, because the income company has not satisfied the tests in Division 165 (relating to continuity of ownership and same business) as required under subsection 170-40(2) of the ITAA 1997.

Facts
The loss company incurred a tax loss in an income year (the 'loss year'). The income company derived assessable income in a later income year (the 'deduction year'). The loss company and income company have been 100% subsidiaries of their holding company since before the loss year. During the deduction year, there was a change in majority ownership of the holding company. Subsequently, in the deduction year, the income company substantially changed its business.

Reasons for decision
Summary: Subdivision 170-A of the ITAA 1997 operates to allow a loss company to transfer an amount of its tax loss to an income company within the same wholly-owned group if the conditions for transfer in the Subdivision are satisfied. Under subsection 170-15(1) of the ITAA 1997, the effect of transferring a prior year tax loss is that it is taken to be a tax loss incurred by the income company in the loss year. One of the conditions for transfer is contained in subsection 170-40(2) of the ITAA 1997, which requires that the income company must not be prevented by Division 165 of the ITAA 1997 from deducting the transferred loss in the deduction year. Division 165 of the ITAA 1997 deals with the income tax consequences of changing ownership of a company. More relevant to the present case, Subdivision 165-A of the ITAA 1997 sets out the conditions that a company must satisfy in order to deduct a tax loss of an earlier year. A company is not entitled to deduct the loss unless it satisfies the continuity of ownership test. Failing that, the company must instead satisfy the same business test. The income company has not satisfied the continuity of ownership test under section 165-12 of the ITAA 1997, as a result of the change in beneficial ownership of the holding company during the ownership test period. The income company has also not satisfied the same business test under section 165-13 of the ITAA 1997 following its change of business in the deduction year. It follows that the income company has not satisfied the conditions for transfer as prescribed under subsection 170-40(2) of the ITAA 1997, and any agreement to transfer the tax loss to the income company will be ineffective.

Legislative references: Income Tax Assessment Act 1997 Subdivision 170-A subsection 170-15(1) subsection 170-40(2) Division 165 Subdivision 165-A section 165-12 section 165-13
Related ATO interpretative decisions: ATO ID 2003/349
Subject references: Continuity of business Continuity of ownership Group company loss transfers