ATO Interpretative Decision
ATO ID 2003/847
Income Tax
Deducting tax loss: saving rule - capitalFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
In applying subsection 165-12(7) of the Income Tax Assessment Act 1997 (ITAA 1997), is a capital loss that is disregarded because the relevant asset was acquired before 20 September 1985, to be taken into account in determining the extent that a loss company's tax loss has been 'reflected'.
Decision
No. Where a capital loss is permanently disregarded pursuant to subsection 104-10(5) of the ITAA 1997 that capital loss will not cause duplication of the loss company's tax 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 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 relevant ownership test period, Company K disposed of an indirect equity interest, 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.
The capital loss that Company K would otherwise have made in respect of the disposal of its indirect equity interest, was disregarded under subsection 104-10(5) of the ITAA 1997, as the interest was acquired before 20 September 1985.
During the relevant ownership test period, no other CGT event happened in relation to any equity interest in Loss Company.
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, only 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 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.
As the capital loss that otherwise would have been made by Company K is permanently disregarded because of the operation of subsection 104-10(5) of the ITAA 1997, the CGT event in respect of Company K's indirect equity interest in Loss Company will not cause loss duplication of Loss Company's tax loss.
As no other CGT event occurred in the relevant ownership test period in relation to equity interests in Loss Company, there has been no duplication of Loss Company's tax loss.
Accordingly subsection 165-12(7) provides that the conditions in subsections 165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997 that were not satisfied, only because of section 165-165 of the ITAA 1997, are taken to have been satisfied.
Date of decision: 1 September 2003Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
subsection 104-10(2)
subsection 104-10(5)
section 165-12
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
Accumulated tax losses
Capital gains tax
Capital losses
CGT event A1-disposal of a CGT asset
CGT events
Companies
Deductions & expenses
Entities & taxpayer groups
Group companies
Group company loss transfers
Group company transfers
Losses
Prior year losses
ISSN: 1445-2782
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