ATO Interpretative Decision
ATO ID 2003/536
Income Tax
Deducting tax loss: saving rule - capital loss unable to be appliedFOI 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This ATO ID has been amended to clarify legislative changes repealed by the Tax Laws Amendment (2007 Measures No 4) Act of 2007 with effect from 24 September 2007.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997) is a capital loss in respect of the disposal of an equity interest in the loss company to be taken into account in determining the extent that a loss company's tax loss has been 'reflected' where the disposer, a company, is unable to apply the capital loss?
Decision
Yes. A loss company's tax loss is reflected in the amount of capital loss that is made in relation to the disposal of the equity interest and is not dependent upon the capacity of the disposer to apply that capital loss.
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 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, as defined in subsection 995-1(1) of the ITAA 1997. 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 capital loss in respect of the disposal of the relevant indirect equity interest.
That capital loss is not taken to be disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.
However, Company K cannot apply that capital loss because it is unable to satisfy the relevant continuity of ownership or same business tests in Division 165 of the ITAA 1997.
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.
* denotes a term defined in subsection 995-1(1) of the ITAA 1997.
Because the happening of CGT event A1 entitled Company K to the relevant capital loss, that is not disregarded, the capital loss is to be taken into account in determining the extent to which the tax loss incurred by Loss Company has been reflected.
In applying subsection 165-12(7) of the ITAA 1997 it is irrelevant that Company K is unable to apply its capital loss.
Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 104-10(2)
subsection 165-12(1)
Division 165
subsection 165-12(2)
subsection 165-12(3)
subsection 165-12(4)
subsection 165-12(7)
section 165-165
Subdivision 170-D
Keywords
Accumulated tax losses
Capital losses
Net capital losses
Prior year losses
Saving rule
Losses & CGT CoE
ISSN: 1445-2782