ATO Interpretative Decision
ATO ID 2003/781
Income Tax
Deducting tax loss: saving rule - disregarded capital loss from disposal of a pre-CGT equity interestFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 respect of a capital loss that is disregarded because the asset was acquired before 20 September 1985?
Decision
No. For a tax loss to be reflected in a capital loss in respect of a direct or indirect equity interest the capital loss must be allowed or allowable under the ITAA 1997 or the Income Tax Assessment Act 1936.
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, only because of the operation of section 165-165.
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 disposal resulted in CGT event A1 happening under subsection 104-10(2).
As the relevant interest disposed of by Company K was acquired by it before 20 September 1985, the capital loss made by it was disregarded under subsection 104-10(5) of the ITAA 1997.
No other CGT event happened in relation to any direct or indirect equity interest in 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) is not satisfied, only because of the operation of section 165-165 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 the capital loss made by Company K in respect of the disposal of its equity interest is disregarded such that it is not recognised under Australian Income Tax law, the disposal is not taken to have reflected the tax loss incurred by Loss Company.
As no other 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) and it can therefore deduct the relevant tax loss, unless otherwise precluded by the ITAA 1997.
Date of decision: 17 July 2003Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1936
the Act
subsection 104-10(2)
subsection 104-10(5)
subsection 165-12(2)
subsection 165-12(3)
subsection 165-12(4)
subsection 165-12(7)
paragraph 165-12(9)(b)
section 165-165
Keywords
Tax loss
Saving rule
ISSN: 1445-2782