ATO Interpretative Decision

ATO ID 2003/533 (Withdrawn)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• This ATO ID is withdrawn as it is a simple restatement of the law and does not contain an interpretative decision.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

In applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997), is a reduced capital gain made in respect of the disposal of an indirect equity interest in a loss company to be taken into account in determining the extent that the loss company's tax loss has been 'reflected', where that reduced capital gain forms part of an increased overall net capital loss made by the relevant interest holder?

Decision

Yes. The tax loss is reflected in the increased net capital loss made by the interest holder which could be applied against future assessable capital gains made by it.

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, only because of the operation of section 165-165.

Company K, during the relevant ownership test period, disposed of an indirect equity interest in Loss Company, as defined in paragraph 165-12(9)(b) of the ITAA 1997.

The disposal resulted in CGT event A1 happening under subsection 104-10(2) of the ITAA 1997, such that Company K made a capital gain in the disposal year of income.

Due to the tax loss incurred by Loss Company, that capital gain was less than it otherwise would have been.

As a result of Company K making other capital losses, the relevant capital gain made by Company K formed part of an overall net capital loss that was greater than it otherwise would have been, had Loss Company not incurred the relevant tax loss.

Reasons for Decision

Subsection 165-12(7) of the ITAA 1997 provides that where a condition in subsections 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 that 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.

In determining the extent that Loss Company's tax loss has been reflected, regard is to be had to the extent that Company K's assessable income has, or could in future, be reduced because of the happening of the CGT event.

The increased net capital loss made by Company K could result in reduced assessable income if the increased component of the net capital loss is applied against future assessable capital gains made by Company K.

Year of income:  Year ended 30 June 2002

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)
   paragraph 165-12(9)(b)
   section 165-165

Keywords
Saving rule
Company losses
Continuity of ownership

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  4 July 2003

ISSN: 1445-2782