ATO Interpretative Decision
ATO ID 2003/697
Income Tax
Deducting tax loss: saving rule - deduction incurred in loss year but partly accrued before loss yearFOI status: may be released
Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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), where an expense was partly accrued prior to a loss year, but was not deductible until the loss year, is that accrued part taken into account in determining the extent that the loss company's tax loss has been reflected in the capital loss, because of the happening of a CGT event from the disposal of an indirect equity interest in the loss company?
Decision
Yes. Where a CGT event in relation to an equity interest has reflected a tax loss, it is irrelevant when an expense was accrued that gave rise to a deduction included in the loss company's tax loss.
Facts
Loss Company seeks to deduct a tax loss that it incurred in an earlier income year ('loss year').
The tax loss cannot be deducted under the continuity of ownership test in section 165-12 of the ITAA 1997 as the conditions in subsections 165-12(2), 165-12(3) and 165-12(4) thereof are not satisfied, only because of the operation of section 165-165 of the ITAA 1997.
The calculation of Loss Company's tax loss for the loss year includes an expense ('the deduction') that was partly accrued prior to the loss year, but was not deductible until the loss year when it was incurred. A quarter of that deduction constituted an accrued expense as at immediately prior to the start of the loss year.
Company K disposed of an indirect equity interest in Loss Company during the ownership test period. That disposal resulted in CGT event A1 ('the CGT event') happening under subsection 104-10(2) of the ITAA 1997 such that Company K made a capital loss.
The capital loss is not disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.
There had been no earlier CGT event happened in relation to that equity interest.
The capital proceeds (see definition in section 116-20) that Company K received in respect of the CGT event were less than they otherwise would have been because of the economic loss that Loss Company suffered in relation to the deduction. That economic loss was referable to the whole of the deduction.
As the capital proceeds were less than they otherwise would have been, Company K therefore made an increased capital loss because of the tax 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 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.
To the extent that Company K made an increased capital loss as a result of the deduction which formed part of Loss Company's tax loss, that deduction has therefore resulted in the tax loss being 'reflected'. It is irrelevant for present purposes when the expense giving rise to the deduction was accrued.
Note: Where an earlier CGT event(s) has happened in relation to the same equity interest, that earlier CGT event may have affected the extent that the tax loss has been reflected in relation to the relevant CGT now being considered.
Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 104-10(2)
section 116-20
section 165-12
subsection 165-12(2)
subsection 165-12(3)
subsection 165-12(4)
subsection 165-12(7)
section 165-165
Subdivision 170-D
subsection 995-1(1)
Keywords
Company losses
Continuity of ownership
Saving rule
ISSN: 1445-2782