ATO Interpretative Decision

ATO ID 2003/536

Income Tax

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This ATO ID has been amended to clarify legislative changes repealed by the Tax Laws Amendment (2007 Measures No 4) Act of 2007 with effect from 24 September 2007.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Decision

Yes. A loss company's tax loss is reflected in the amount of capital loss that is made in relation to the disposal of the equity interest and is not dependent upon the capacity of the disposer to apply that capital loss.

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 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.

During the relevant ownership test period as defined in subsection 165-12(1) of the ITAA 1997, Company K disposed of an indirect equity interest, 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, Company K became entitled to a capital loss in respect of the disposal of the relevant indirect equity interest.

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

However, Company K cannot apply that capital loss because it is unable to satisfy the relevant continuity of ownership or same business tests in Division 165 of the ITAA 1997.

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 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 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.

Because the happening of CGT event A1 entitled Company K to the relevant capital loss, that is not disregarded, the capital loss is to be taken into account in determining the extent to which the tax loss incurred by Loss Company has been reflected.

In applying subsection 165-12(7) of the ITAA 1997 it is irrelevant that Company K is unable to apply its capital loss.

Note: This ATO ID has been amended to remove any reference to subsection 165-12(9) of the ITAA 1997. Subsection 165-12(9) of the ITAA 1997 was repealed by the Tax Laws Amendment (2007 Measures No 4) Act 2007 (Act 143 of 2007) with effect from 24 September 2007. The Amending Act transfers the meaning of 'direct and indirect equity interests', previously contained in subsection 165-12(9) of the ITAA 1997 to subsection 995-1(1) of the ITAA 1997.

However, this change does not affect the decision in this interpretative decision.

Date of decision: 13 May 2003

Year of income: Year ended 30 June 2002

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

Keywords
Accumulated tax losses
Capital losses
Net capital losses
Prior year losses
Saving rule
Losses & CGT CoE

Siebel/TDMS Reference Number: 3564756

Business Line: Public Groups and International

Date of publication: 4 July 2003

ISSN: 1445-2782

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).