ATO Interpretative Decision
ATO ID 2003/370
Income Tax
Deducting Tax Loss: Saving Rule - Deduction in respect of equity interest forms part of disposer's tax lossFOI status: may be released
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This ATO ID was amended by replacing the former paragraph 165-12(7)(b) with the amended paragraph 165-12(7)(b). The date of amendment was 24 September 2007.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
In applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997), is a deduction in respect of the disposal of an equity interest in a loss company to be taken into account in determining the extent to which a tax loss has been 'reflected', where that deduction forms part of a tax loss of the disposer?
Decision
Yes. A loss company's tax loss is 'reflected' in the amount of deduction that is allowed or allowable in relation to the disposal of the equity interest, and is not dependent upon the relevant deduction being utilised by the disposer.
Facts
Loss Company seeks to deduct a tax loss that it incurred in an earlier year of income.
The tax loss cannot be deducted as the conditions in subsection 165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997 are not satisfied because of the operation of section 165-165 of the ITAA 1997.
Company K disposed of an indirect equity interest, as defined in paragraph 165-12(9)(b) of the ITAA 1997, during the relevant ownership test period. The disposal resulted in CGT event A1 happening under subsection 104-10(2) of the ITAA 1997.
Because of the happening of CGT event A1, Company K became entitled to a deduction in respect of the disposal of the relevant indirect equity interest.
That deduction is not taken to be disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.
The deduction forms part of Company K's tax loss for the income year in which the disposal of the interest occurred.
Reasons for Decision
Subsection 165-12(7) of the ITAA 1997 provides that where a condition in subsection 165-12(2), 165-12(3) or 165-12(4) is not satisfied because of the operation of section 165-165 of the ITAA 1997, that the condition can be taken as being satisfied where:
the company has information from which it would be reasonable to conclude that less than 50% of the *tax loss has been reflected in deductions, capital losses, or reduced assessable income, that occurred, or could occur in future, because of the happening of any *CGT event in relation to any *direct equity interests or *indirect equity interests in the company during the *ownership test period
Note: * denotes a term defined in section 995-1 of the ITAA 1997.
Because the happening of CGT event A1 entitled Company K to the relevant deduction (that is not disregarded), the deduction is to be taken into account in determining the extent to which the tax loss incurred by Loss Company has been reflected.
In determining the extent that Loss Company's tax loss has been reflected, regard is to be had to the extent that a disposer's deduction in relation to the disposal of a direct or indirect equity interest in the Loss Company, is greater than it would otherwise have been but for that tax loss being incurred.
Unless the disposer's deduction is disregarded under the ITAA 1997 or the Income Tax Assessment Act 1936 it is irrelevant for the purposes of applying subsection 165-12(7) of the ITAA 1997 when the disposer utilises the deduction.
Date of decision: 27 March 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
The Act
subsection 104-10(2)
subsection 165-12(2)
subsection 165-12(3)
subsection 165-12(4)
subsection 165-12(7)
paragraph 165-12(9)(b)
section 165-165
Subdivision 170-D Related ATO Interpretative Decisions
ATO ID 2003/371
Keywords
Losses
ISSN: 1445-2782