ATO Interpretative Decision
ATO ID 2003/601
Income Tax
Deducting tax loss - saving rule - deduction in respect of equity interest transferred to another group companyFOI status: may be released
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This ATO ID was amended by replacing the reference to subsection 165-12(9) of the ITAA 1997 with a reference to section 995-1 of the ITAA 1997.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 Act 1997 (ITAA 1997), is a deduction 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 has transferred the relevant deduction to another group company as part of a tax loss transferred under Subdivision 170-A of the ITAA 1997?
Decision
Yes. A loss company's tax loss is reflected in the amount of deduction that is allowed or allowable in relation to the disposal of the equity interest and is not dependent upon the relevant deduction being utilised by the disposer.
Facts
Loss Company seeks to deduct a tax loss in its 2002 income year that it had incurred in its 2001 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 of the ITAA 1997.
During the 2001 income year, Company K disposed of an indirect equity interest in Loss Company, 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 deduction in the 2001 income year in respect of the disposal of the relevant indirect equity interest.
That deduction is not taken to be disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.
Company K incurred a tax loss in the 2001 income year, all of which it transferred under Subdivision 170-A of the ITAA 1997 to another group company, that is, Company R, for a deduction year that was also the 2001 income year.
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 deduction that is not disregarded, the deduction is to be taken into account in determining the extent to which the tax loss incurred by Loss Company has been reflected.
In determining the extent that Loss Company's tax loss has been reflected, regard is to be had to the extent that a disposer's deduction in relation to the disposal of a direct or indirect equity interest in Loss Company is greater than it would otherwise have been, but for that tax loss being incurred.
Pursuant to subsection 170-20(2) of the ITAA 1997, Company K is taken not to have incurred the tax loss it made in the disposal year. Instead, that tax loss is taken by subsection 170-10(2) to be a tax loss incurred by Company R. Subsection 170-15(2) further provides that Company R is taken to have incurred the transferred tax loss in its 2000 income year.
Under subsection 165-12(1) of the ITAA 1997, the relevant ownership test period in respect of the tax loss which Company K seeks to deduct, is the start of its 2001 loss year to the end of the 2002 income in which it seeks to deduct the tax loss.
The question then arises as to whether Loss Company's tax loss can be reflected in a deduction in respect of the disposal of an equity interest that, pursuant to subsection 170-15(2) of the ITAA 1997, is deemed to have been incurred by Company R in an income year that precedes the relevant ownership test period.
As the relevant deduction arose because of a CGT event that happened in the ownership test period, it is to be taken into account in subsection 165-12(7) of the ITAA 1997 in determining the extent that Loss Company's tax loss has been reflected.
Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 36-10(3)
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
subsection 170-10(2)
subsection 170-15(2)
subsection 170-20(2)
Subdivision 170-D
Keywords
Accumulated tax losses
Capital gains tax
CGT event A1 - disposal of a CGT asset
Dealings & transactions
Deductions & expenses
Losses
Prior year losses
Saving Rule
ISSN: 1445-2782
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