ATO Interpretative Decision
ATO ID 2003/1111 (Withdrawn)
Income Tax
Deducting tax loss: saving rule - limit on extent that the tax loss can be reflectedFOI status: may be released
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This ATO ID is withdrawn and replaced by ATO ID 2010/63.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
Status of this decision: Decision Withdrawn 19 March 2010
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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) does the amount of capital loss made in respect of a CGT event, in relation to an equity interest in the Loss Company, constitute an upper limit on the extent that the particular CGT event may have 'reflected' the tax loss?
Decision
No. The CGT event may also further reflect the tax loss through reduced assessable income resulted from the tax loss due to a capital gain that otherwise would have been made not happening because of the tax loss incurred by the Loss Company.
Facts
Loss Company seeks to deduct a tax loss that it had incurred in an earlier income year.
The tax loss cannot be deducted as the conditions in subsections 165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997 are not satisfied, only because of the operation of section 165-165 of the ITAA 1997.
During the relevant 'ownership test period' as defined in subsection 165-12(1) of the ITAA 1997, Company K disposed of a direct equity interest in Loss Company, as defined in paragraph 165-12(9)(a) of the ITAA 1997. The disposal resulted in CGT event A1 happening under section 104-10 of the ITAA 1997.
The reduced cost base of that equity interest, as at the time of the CGT event, was $800 for the purposes of section 110-55 of the ITAA 1997. The cost base of the equity interest was also $800 for the purposes of section 110-25 of the ITAA 1997.
The proceeds received by Company K from the disposal were $100.
Due to the tax loss incurred by Loss Company, the market value of Company K's direct equity interest in Loss Company was decreased from $1,000 to the $100 received by Company K in respect of the CGT event.
Company K made a $700 capital loss as per subsection 104-10(4) of the ITAA 1997 in respect of the disposal of the equity interest.
That capital loss is not taken to be disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.
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 or indirect equity interests in the company during the *ownership test period.
* denotes a term defined in subsection 995-1(1) of the ITAA 1997.
As a result of the tax loss incurred by Loss Company, the $200 assessable capital gain that Company K would otherwise have made from the disposal of its interest in Loss Company, changed to a $700 capital loss.
As provided by ATO ID 2003/535, the extent that a tax loss has been reflected is determined by taking into account the combined extent that the tax loss has or will be reflected by way of capital losses, reduced assessable income and deductions.
Accordingly, the disposal of Company K's interest in loss Company has reflected the tax loss by $900, through the $700 capital loss and $200 reduced assessable income.
This is the case even if a single CGT event in relation to an equity interest causes both a capital loss and reduced assessable income.
Date of decision: 25 November 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
subsection 104-10(4)
section 110-25
section 110-55
Division 165
subsection 165-12(1)
subsection 165-12(2)
subsection 165-12(3)
subsection 165-12(4)
subsection 165-12(7)
paragraph 165-12(9)(a)
section 165-165
Subdivision 170-D
Keywords
Capital losses
Ownership test period
Saving rule
Tax loss
ISSN: 1445-2782
| Date: | Version: | |
| 25 November 2003 | Original statement | |
| You are here → | 19 March 2010 | Archived |