ATO Interpretative Decision

ATO ID 2003/390

Income Tax

Deducting Tax Loss: saving rule - equity interest owned by an individual
FOI status: may be released

This ATO ID has been amended to clarify legislative changes repealed by the Tax Laws Amendment (2007 Measures No 4) Act of 2007 with effect from 24 September 2007

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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), are CGT events in respect of equity interests held by individuals taken into account in determining the extent that a Loss company's tax loss has been 'reflected'?

Decision

Yes. The definition of direct or indirect equity interests in subsection 995-1(1) of the ITAA 1997 does not exclude from the operation of subsection 165-12(7) of the ITAA 1997 direct or indirect equity interests on the basis that they are owned by individuals.

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 subsection 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, an individual 'D' disposed of an indirect equity interest in the Loss Company, 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, individual D became entitled to a capital loss in respect of the disposal of the relevant indirect equity interest in the Loss Company.

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 section 995-1(1) of the ITAA 1997.

For the purposes of applying subsection 165-12(7) of the ITAA 1997, the terms 'direct equity interests' and 'indirect equity interests' are defined in subsection 995-1(1) of the ITAA 1997 as follows:

(9): For the purposes of subsections (7) and (8):
: direct equity interests in a company are *shares in the company; and
: indirect equity interests: an entity has indirect equity interests in a company if it has *shares or other interests in entities interposed between the entity and the company.

As the above definitions do not exclude equity interests owned by individuals, D's indirect equity interest in Loss Company that was subject to a CGT event in the relevant ownership test period, must be taken into account in determining the extent that Loss Company's tax loss has been reflected.

[HISTORY: This ATO ID has been amended to include the (*) asterisk when reference is made in subsection 165-12(7) of the ITAA 1997 to direct equity interests and indirect equity interests having been made defined terms under subsection 995-1(1) of ITAA 1997. The amendment also removes from the ATO ID any reference to subsection 165-12(9) of the ITAA 1997 repealed by the Tax Laws Amendment (2007 Measures No 4) Act 2007 with effect from 24 September 2007.]

Date of decision: 7 April 2003

Year of income: Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   subsection 104-10(2)
   section 165-12
   subsection 165-12(2)
   subsection 165-12(3)
   subsection 165-12(4)
   subsection 165-12(7)
   section 165-165
   subsection 995-1(1)

Keywords
Accumulated tax losses
Prior year losses

Siebel/TDMS Reference Number: 3546849

Business Line: Public Groups and International

Date of publication: 23 May 2003

ISSN: 1445-2782

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