ATO Interpretative Decision

ATO ID 2003/267 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database as it is a simple restatement of the law and does not contain an interpretative decision.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Will a capital loss made by a non-resident company on the disposal of a CGT asset to a resident company that is a member of the same 'linked group' be disregarded by the operation of Subdivision 170-D of the Income Tax Assessment Act 1997 (ITAA 1997) if the asset has 'the necessary connection with Australia'?

Decision

Yes. Subdivision 170-D of the ITAA 1997 will apply in accordance with section 170-255 of the ITAA 1997.

Facts

The taxpayer, Company A, is a non-resident of Australia for taxation purposes.

Company S is a 51% owned subsidiary of Company A and is a resident of Australia for taxation purposes. The other 49% shareholding in Company S is owned by unrelated persons.

Company A has a controlling stake in Company S and the two companies are linked for the purposes of subsection 170-260(2) of the ITAA 1997. Company S is not a connected entity of Company A for the purposes of section 170-265 of the ITAA 1997.

Company A disposed of shares in an Australian resident private company to Company S, resulting in CGT event A1 happening for the purposes of subsection 104-10(1) of the ITAA 1997.

The shares had 'the necessary connection with Australia' for the purposes of Category 3 in section 136-25 of the ITAA 1997.

The capital proceeds were less than the share's reduced cost base at the time of the CGT event and Company A made a capital loss in accordance with subsection 104-10(4) of the ITAA 1997.

Reasons for Decision

Subsection 170-255(1) of the ITAA 1997 provides that Subdivision 170-D of the ITAA 1997 will apply if:

(a)

an event (the deferral event ) happens involving a company (the originating company ) and another entity; and

(b)

one or more of the following apply:

(i)

the deferral event is a *CGT event that would have resulted in the originating company making a *capital loss (except a capital loss that would be disregarded under a provision of this Act other than this Subdivision);

(ii)

...;

(iii)

...; and

(c)

if subparagraph (b)(i) applies -- the CGT event is one of the following:

(i)

CGT events A1 and B1 (a disposal case );

(ii)

CGT events D1, D2, D3 and F1 (a creation case ); and

(d)

one of the following applies:

(i)

...;

(ii)

...;

(iii)

if the deferral event is a CGT event A1, B1 or F1 -- the asset or the subject of the lease, as the case may be, had the *necessary connection with Australia immediately before the deferral event;

(iv)

...;

(v)

...; and

(e)

at the time of the deferral event, the originating company is a member of a *linked group and one of the following applies:

(i)

the other entity is a company that is not a connected entity of the originating company and is a member of that linked group;

(ii)

...;

(iii)

...

* denotes a term defined in section 995-1 of the ITAA 1997.

For Subdivision 170-D of the ITAA 1997 to apply, paragraphs 170-255(1)(a) to (e) of the ITAA 1997 must all apply.

The disposal by Company A of its Australian shareholding to Company S is a deferral event for the purposes of paragraph 170-255(1)(a) of the ITAA 1997.

Section 136-10 of the ITAA 1997 provides that a capital gain or a capital loss is made where CGT event A1 happens to an asset that has 'the necessary connection with Australia'. Therefore, the deferral event was a CGT event that would have resulted in Company A making a capital loss for the purposes of subparagraph 170-255(1)(b)(i) of the ITAA 1997.

The disposal by Company A of its Australian shareholding to Company S results in CGT event A1 happening for the purposes of subparagraph 170-255(1)(c)(i) of the ITAA 1997.

The deferral event is a CGT event A1 and the asset had 'the necessary connection with Australia' immediately before the deferral event for the purposes of subparagraph 170-255(1)(d)(iii) of the ITAA 1997.

At the time of the deferral event, Company A was a member of a linked group and Company S was not a connected entity of Company A but was a member of that linked group for the purpose of subparagraph 170-255(1)(e)(i) of the ITAA 1997.

As each of paragraphs 170-255(1)(a) to (e) of the ITAA 1997 apply then section 170-270 of Subdivision 170-D of the ITAA 1997 applies to disregard the relevant capital loss.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   subsection 104-10(1)
   subsection 104-10(4)
   section 136-10
   section 136-25
   Subdivision 170-D
   section 170-255
   subsection 170-255(1)
   paragraph 170-255(1)(a)
   paragraph 170-255(1)(b)
   subparagraph 170-255(1)(b)(i)
   paragraph 170-255(1)(c)
   subparagraph 170-255(1)(c)(i)
   paragraph 170-255(1)(d)
   subparagraph 170-255(1)(d)(iii)
   paragraph 170-255(1)(e)
   subparagraph 170-255(1)(e)(i)
   subsection 170-260(2)
   section 170-270

Related ATO Interpretative Decisions
ATO ID 2003/264
ATO ID 2003/265
ATO ID 2003/266

Keywords
Capital gains tax
Capital losses
CGT asset with the necessary connection with Australia
DCLD connected entity
Deferral event
Deferred capital losses
Disregarded capital loss
Linked group
Losses and Capital Gains Tax CoE
Originating company
Relevant CGT asset

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  29 April 2003

ISSN: 1445-2782