ATO Interpretative Decision

ATO ID 2003/67

Income Tax

Deferred capital loss or deduction: greater than 50% interest - partial reacquisition by originating company
FOI status: may be released

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Does a further event happen for the purposes of subsection 170-280(1) of the Income Tax Assessment Act 1997 (ITAA 1997) where the relevant capital gains tax (CGT) asset is acquired by the originating company and another entity, neither of which acquires a greater than 50% interest in it?

Decision

Yes. The originating company and one or more other entities together may acquire interests of greater than 50% in total. Therefore, the word 'or' in the term '...acquired by the originating company or by an entity...' in paragraph 170-280(1)(a) of the ITAA 1997 is used in the conjunctive sense of meaning 'and/or'.

Facts

The taxpayer, company P disposed of a CGT asset to its 100% owned subsidiary, company S.

The disposal of the CGT asset resulted in CGT event A1 happening for the purposes of subsection 104-10(1) of the ITAA 1997.

The capital proceeds were less than the asset's reduced cost base and the taxpayer made a capital loss in accordance with subsection 104-10(4) of the ITAA 1997.

Company P and company S were linked at the time of the CGT event for the purposes of subsection 170-260(2) of the ITAA 1997 so that the capital loss was disregarded pursuant to section 170-270 of the ITAA 1997.

Company S subsequently disposed of the CGT asset to two other companies, X and Y, who each acquired a 50% interest in it.

For the purposes of paragraph 170-275(1)(b) of the ITAA 1997 neither X or Y were, at the time of acquiring their interests in the CGT asset, part of the same linked group as company P, nor a connected entity or an associate of a connected entity.

Thus, pursuant to section 170-275 of the ITAA 1997, company P was taken to have made a capital loss equivalent to the capital loss that was previously disregarded pursuant to section 170-270 of the ITAA 1997.

Within four years of the disposal by company S, X disposed of its 50% interest in the CGT asset to company P and Y disposed of its 50% interest in the CGT asset to company S. Company P and company S were still linked.

Reasons for Decision

Paragraph 170-280(1)(a) of the ITAA 1997 refers to a further event where:

'...the asset or a greater than 50% interest in it is acquired by the originating company or by an entity that, at the time of the acquisition, is:

(i)
a company that is a member of the linked group of which the originating company is a member; or

(ii)
a connected entity of the originating company; or

(iii)
an associate of such a connected entity...' [Emphasis added]

Where the originating company and another entity(s) that are included by subparagraphs 170-280(1)(a)(i), 170-280(1)(a)(ii) or 170-280(1)(a)(iii) of the ITAA 1997 together acquire interests in the relevant CGT asset of greater than 50% in total at a relevant time, then a further event occurs.

Whilst it is possible for the originating company or some other entity to acquire a greater than 50% interest in the relevant CGT asset separately, the originating company and/or one or more other entities together may alternatively acquire interests of greater than 50% in total. Therefore, the word 'or' in the term '...acquired by the originating company or by an entity...' in paragraph 170-280(1)(a) of the ITAA 1997 should be interpreted in the conjunctive sense of meaning 'and/or'.

As paragraph 170-280(1)(a) of the ITAA 1997 applies then, pursuant to subsection 170-280(2) of the ITAA 1997, company P is taken not to have made a capital loss at the time of the further event equal to the amount of capital loss that it was taken to have made by subsection 170-275(1) of the ITAA 1997.

Date of decision: 14 January 2003

Year of income: Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   subsection 104-10(1)
   subsection 170-260(2)
   section 170-270
   section 170-275
   subsection 170-275(1)
   paragraph 170-275(1)(b)
   paragraph 170-280(1)(a)
   subsection 170-280(2)

Related ATO Interpretative Decisions
ATO ID 2003/116

Keywords
Capital gains tax
Capital losses
Net capital losses
CGT roll-over relief
Company losses
Deferred capital losses
Deferred capital losses and deductions
Connected entity
Deferral event
Disregarded capital loss
Further event
Linked group
Originating company
Relevant CGT asset

Siebel/TDMS Reference Number: CRS80452

Business Line: Public Groups and International

Date of publication: 15 March 2003

ISSN: 1445-2782

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