ATO Interpretative Decision

ATO ID 2003/397

Income Tax

Deducting tax loss: saving rule - tax loss includes taxation concession
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This ATO ID has been amended to clarify legislative changes repealed by the Tax Laws Amendment (2007 Measures No 4) Act of 2007 with effect from 24 September 2007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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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), is the accelerated component of a taxation deduction allowed in the calculation of the loss company's tax loss, to be taken into account in determining the extent that a capital loss made in respect of the disposal of an equity interest in the loss company, has reflected the tax loss?

Decision

No. To the extent that a taxation deduction allowed in the calculation of the loss company's tax loss exceeds the decline in economic value in the loss year of the relevant item, the accelerated component of the deduction is not 'reflected', as it would not have increased the relevant capital loss.

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 because of the operation of section 165-165 of the ITAA 1997.

The calculation of Loss Company's tax loss includes a taxation concession, to the extent that a taxation deduction in respect of an item is greater than the item's decline in economic value, during the relevant loss year.

Company K disposed of an indirect equity interest in the Loss Company during the relevant ownership test period. 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 made a capital loss in respect of the disposal of the indirect equity interest in the Loss Company.

That capital loss is not taken to be disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.

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 of the ITAA 1997.

In determining the extent that a loss company's tax loss has been reflected, regard is to be had to the extent that a disposer's capital loss, in relation to the disposal of a direct or indirect equity interest in the loss company, is greater than it would otherwise have been, but for that tax loss being incurred.

To the extent that the taxation deduction allowed in the calculation of Loss Company's tax loss exceeds the decline in economic value in the loss year of the relevant item, the accelerated component of the deduction would not have increased the capital loss made in respect of the disposal of Company K's equity interest in Loss Company, and is therefore not 'reflected' to that extent.

[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 section 995-1 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: 7 April 2003

Year of income: Year ended 30 June 2003

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

Keywords
Accumulated tax losses
Prior year losses

Siebel/TDMS Reference Number: 3546684

Business Line: Public Groups and International

Date of publication: 23 May 2003

ISSN: 1445-2782

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