ATO Interpretative Decision
ATO ID 2003/369
Income Tax
Deducting Tax Loss: Saving Rule - Deduction in respect of interest in loss company allowable in foreign jurisdictionFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 tax loss 'reflected' in deductions that may be claimed in a foreign tax jurisdiction in respect of the disposal of any direct or indirect interest in the loss company?
Decision
No. To be 'reflected', a deduction in respect of the disposal of an interest in the loss company must be allowed or allowable under the ITAA 1997 or the Income Tax Assessment Act 1936, as the entitlement to a deduction must happen because of a CGT event.
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 relevant interest disposed of by Company K was not a CGT asset. As a result of the disposal, Company K is not entitled to a deduction under Australian Income Tax law, but is entitled to a tax deduction in a foreign jurisdiction.
No CGT event happened in relation to any direct or indirect equity interest in the Loss Company during the ownership test period.
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) of the ITAA 1997 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
The deduction that Company K became entitled to in a foreign jurisdiction, because of the disposal of an indirect equity interest in Loss Company, is not taken into account in subsection 165-12(7) of the ITAA 1997 in determining the extent that the tax loss has been reflected, because it did not result from the happening of a CGT event.
As no CGT event happened in relation to any direct or indirect equity interest in Loss Company during the ownership test period, more than 50% of the tax loss cannot be reflected for the purposes of subsection 165-12(7) of the ITAA 1997.
Accordingly, Loss Company is taken by subsection 165-12(7) of the ITAA 1997 to have satisfied the conditions in 165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997 and it can therefore, deduct the relevant tax loss unless otherwise precluded by the ITAA 1997.
Date of decision: 7 April 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
The Act
subsection 165-12(2)
subsection 165-12(3)
subsection 165-12(4)
subsection 165-12(7)
section 165-165
Keywords
Losses
Foreign tax laws
ISSN: 1445-2782