ATO Interpretative Decision

ATO ID 2003/495 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as it is a simple restatement of the law and does not contain an interpretative decision.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

Where the tax loss of a loss company has been reduced pursuant to Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) is the relevant 'tax loss' for the purposes of applying subsection 165-12(7) of the Income Tax Assessment Act 1997 (ITAA 1997) the amount of the tax loss as originally calculated under section 36-10 of the ITAA 1997?

Decision

No. In applying the 'less than 50% of the tax loss' requirement in subsection 165-12(7) of the ITAA 1997, the relevant tax loss is the amount that was obtained after application of Schedule 2C to the ITAA 1936.

Facts

In the relevant loss year, Loss Company incurred a tax loss of $100 calculated under section 36-10 of the ITAA 1997.

In the first succeeding income year after the loss year (the forgiveness year of income) the total net forgiven amount of Loss Company's debts in accordance with subsection 245-105(1) of Schedule 2C to the ITAA 1936, was $30. The application of this amount of $30 pursuant to subsection 245-105(5) resulted in the tax loss incurred by Loss Company being reduced to an amount of $70.

In the second succeeding income year after the loss year, Loss Company was not able to satisfy the conditions in subsections 165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997, only due to the operation of the 'same share same interest rule' in section 165-165 of the ITAA 1997.

Loss Company would be able to deduct the tax loss under section 36-10 of the ITAA 1997 if the requirements of subsection 165-12(7) of the ITAA 1997 (the 'saving rule') were met, enabling the conditions in subsection 165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997 to be treated as having been satisfied.

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) of the ITAA 1997 is not satisfied, only because of the operation of section 165-165 of the ITAA 1997 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

Under section 36-15 of the ITAA 1997, Loss Company may deduct tax losses for prior income years that have been calculated in accordance with section 36-10 of the ITAA 1997.

The note to subsection 36-15(7) of the ITAA 1997 then states that:

Your tax losses under this Division may be reduced if any of your commercial debts have been forgiven in the income year: see Subdivision 245-E of Schedule 2C to the Income Tax Assessment Act 1936.

In accordance with subsection 245-105(5) of Schedule 2C to the ITAA 1936, Loss Company must apply its total net forgiven amount of $30 against deductible revenue losses that it incurred in income years before the forgiveness year of income. Deductible revenue losses are defined in section 245-110 of Schedule 2C to the ITAA 1936 to include tax losses that are deductible pursuant to section 36-15 of the ITAA 1997.

Therefore in applying the 'less than 50% of the tax loss' requirement in subsection 165-12(7) of the ITAA 1997, the relevant tax loss is the amount of $70 that was obtained after application of Schedule 2C to the ITAA 1936, and not the amount of $100 that was originally calculated in accordance with section 36-10 of the ITAA 1997.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C
   Schedule 2C Subdivision 245-E
   Schedule 2C subsection 245-105(1)
   Schedule 2C subsection 245-105 (5)
   Schedule 2C section 245-110

Keywords
Company losses

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  27 June 2003

ISSN: 1445-2782