ATO Interpretative Decision
ATO ID 2003/394
Income Tax
Deducting tax loss: saving rule - capital loss in respect of equity interest no longer disregarded under Subdivision 170-DFOI status: may be released
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This ATO ID has been amended to clarify legislative changes repealed by the Tax Laws Amendment (2007 Measures No 4) Act of 2007 with effect from 24 September 2007.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 determining the extent that a tax loss has been reflected for the purposes of applying subsection 165-12(7) of the Income Tax Assessment Act 1997 (ITAA 1997), is a capital loss in relation to an indirect equity interest in the loss company that is taken to be made under section 170-275 of Subdivision 170-D of the ITAA 1997 during the relevant ownership test period, to be taken into account?
Decision
No. Only the associated capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997 is to be taken into account in applying subsection 165-12(7) of the ITAA 1997.
Facts
Loss Company seeks to deduct a tax loss that it has made 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 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 an indirect equity interest in Loss Company, as defined in subsection 995-1(1) of the ITAA 1997, to Company R. That 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 capital loss in the disposal year in respect of the disposal of the relevant indirect equity interest.
That capital loss was disregarded under subsection 170-270(1) of Subdivision 170-D of the ITAA 1997.
Subsequently, during the ownership test period, Company R disposed of the same indirect equity interest in Loss Company which resulted in section 170-275 of the ITAA 1997 applying, such that Company K as originating company, was then taken to have made a capital loss at that time equivalent to that disregarded capital loss.
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 assume 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.
*denotes a term defined in subsection 995-1(1) of the ITAA 1997.
The capital loss that Company K was taken to have made under section 170-275 of the ITAA 1997 is not taken into account in determining the extent that the tax loss has been 'reflected' for the purposes of applying subsection 165-12(7) of the ITAA 1997 as the associated capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997 is to be taken into account. (Refer ATO ID 2003/395).
Note: Had the capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997, pre-dated the ownership test period, the capital loss that Company K was taken to have made under section 170-275 would still not be taken into account in applying subsection 165-12(7) of the ITAA 1997.
Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
subsection 104-10(2)
subsection 165-12(1)
subsection 165-12(2)
subsection 165-12(3)
subsection 165-12(4)
subsection 165-12(7)
section 165-165
Subdivision 170-D
subsection 170-270(1)
section 170-275
Subsection 995-1(1)
ATO ID 2003/395
Keywords
Capital losses
Deferral event
Deferred capital losses
Disregarded capital loss
Losses and Capital Gains Tax CoE
Net capital losses
Originating company
ISSN: 1445-2782