ATO Interpretative Decision

ATO ID 2003/395

Income Tax

Deducting tax loss: saving rule - capital loss in respect of equity interest disregarded under Subdivision 170-D
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This ATO ID has been amended to clarify legislative changes repealed by the Tax Laws Amendment (2007 Measures No 4) Act of 2007 with effect from 24 September 2007.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 determining the extent that a tax loss has been reflected for the purposes of applying subsection 165-12(7) of the Income Tax Assessment Act 1997 (ITAA 1997), is a capital loss in respect of a CGT event in relation to an indirect equity interest in the loss company taken into account where it is disregarded under Subdivision 170-D of the ITAA 1997?

Decision

Yes. Subsection 165-12(7) of the ITAA 1997 takes into account capital losses that 'could occur in future' because of the happening of a CGT event in the relevant ownership test period.

Facts

Loss Company seeks to deduct a tax loss that it has made 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.

In the relevant ownership test period, as defined in subsection 165-12(1) of the ITAA 1997, Company K disposed of an indirect equity interest in Loss Company, as defined in subsection 995-1(1) of the ITAA 1997 to Company R. 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 the disposal year in respect of the disposal of the relevant indirect equity interest.

That capital loss was disregarded under subsection 170-270(1) of Subdivision 170-D of the ITAA 1997.

In respect of that disregarded capital loss, there were no subsequent consequences in the ownership test period for Company K as 'originating company' that resulted in section 170-275 of the ITAA 1997 applying, such that it was taken to have made a capital loss equivalent to that disregarded capital 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 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 subsection 995-1(1) of the ITAA 1997.

The capital loss that Company K had disregarded under subsection 170-270(1) of the ITAA 1997 in respect of an indirect equity interest in Loss Company, is to be taken into account in determining the extent that the tax loss that Loss Company seeks to deduct has been reflected for the purposes of applying subsection 165-12(7) of the ITAA 1997.

Company K 'could in future' become entitled to an equivalent capital loss under section 170-275 of the ITAA 1997, to the capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997. That possible future entitlement to an equivalent capital loss, directly results from the happening of the CGT event in which Company K disposed of an indirect equity interest in Loss Company to Company R, during the ownership test period.

[HISTORY: This ATOID has been amended to include the (*) asterisk in subsection 165-12(7) that is a minor amendment to the provisions providing useful interpretation with reference to direct equity interests and indirect equity interests by making them 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) repealed by the Tax Laws Amendment (2007 Measures No 4) Act 2007 with effect from 24 September 2007.]

Date of decision: 17 April 2003

Year of income: Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   subsection 104-10(2)
   subsection 165-12(1)
   subsection 165-12(2)
   subsection 165-12(3)
   subsection 165-12(4)
   subsection 165-12(7)
   section 165-165
   Subdivision 170-D
   subsection 170-270(1)
   section 170-275
   subsection 995-1(1)

Related ATO Interpretative Decisions
ATO ID 2003/394

Keywords
Capital losses
Deferral event
Deferred capital losses
Disregarded capital loss
Losses and Capital Gains Tax CoE
Net capital losses
Originating company

Siebel/TDMS Reference Number: 3559469

Business Line: Public Groups and International

Date of publication: 23 May 2003

ISSN: 1445-2782

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