ATO ID 2003/22: Group company loss transfers: - income company unable to utilise whole of transferred amount
Date of decision: 18 November 2002
Year of income: Year ended 30 June 2001
Business line: Public Groups and International

Issue
Can an 'income' company that is unable to fully utilise a tax loss transferred to it under Subdivision 170-A of the Income Tax Assessment Act 1997 (ITAA 1997), as a result of a subsequent adjustment to its assessable income, retain the excess amount of the loss for later use?

Decision
No. Under Subdivision 170-A of the ITAA 1997, the amount transferred under a loss transfer agreement cannot exceed the maximum amount of loss that the income company can utilise in the deduction year. If the written agreement specifies a greater amount, only the maximum amount that can be utilised by the income company in the deduction year is taken to have been transferred.

Facts
Two companies are Australian residents and have been members of the same wholly owned group of companies since before 1 July 1998. They satisfied the requirements to enable them to enter into a loss transfer agreement under which the loss company agreed to transfer an amount of tax loss incurred in the 2001 income year to the income company in respect of its 2002 income year. The amount transferred reduced the taxable income of the income company to nil. Subsequent to the making of this agreement, the income company requested an adjustment to its 2002 income tax return to reduce its assessable income. After the adjustment the income company would be unable to utilise the whole of the loss amount specified in the loss transfer agreement.

Reasons for decision
Summary: Subdivision 170-A of the ITAA 1997 allows for the transfer of tax losses between members of a wholly owned group of companies. An agreement to transfer a loss under Subdivision 170-A of the ITAA 1997 is effective when the conditions laid down within the Subdivision have been satisfied. In particular, to transfer a tax loss in a particular year, two group companies must make a written loss transfer agreement under section 170-50 of the ITAA 1997 specifying the amount of the tax loss being transferred. The amount transferred cannot exceed the amount the income company can claim as a deduction for the year of transfer (subsection 170-45(2) of the ITAA 1997). With the subsequent reduction in assessable income of the income company for the 2002 income year, the amount specified in the written transfer agreement will exceed the amount which the income company can claim as a deduction. In these circumstances, section 170-65 of the ITAA 1997 operates as an adjusting mechanism whereby the amount specified in the agreement is taken to be the revised amount which the income company can use. This becomes the maximum amount which the loss company can transfer. Accordingly, where the income of the income company is reduced after an effective loss transfer agreement is made, there can be no excess tax loss available to the income company. The excess tax loss will effectively revert to the loss company.

Legislative references: Income Tax Assessment Act 1997 section 170-1 section 170-45 paragraph 170-50(2)(d) section 170-65
Related public rulings and determinations: Taxation Ruling TR 98/12
Related ATO interpretative decisions: ATO ID 2003/18 | ATO ID 2003/19 | ATO ID 2003/21 | ATO ID 2003/23
Subject references: Group company transfers Group company loss transfers Extension of time