ATO ID 2003/369: Deducting Tax Loss: Saving Rule - Deduction in respect of interest in loss company allowable in foreign jurisdiction
Date of decision: 7 April 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
In applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997), is a tax loss 'reflected' in deductions that may be claimed in a foreign tax jurisdiction in respect of the disposal of any direct or indirect interest in the loss company?

Decision
No. To be 'reflected', a deduction in respect of the disposal of an interest in the loss company must be allowed or allowable under the ITAA 1997 or the Income Tax Assessment Act 1936 , as the entitlement to a deduction must happen because of a CGT event.

Facts
Loss Company seeks to deduct a tax loss that it incurred in an earlier year of income. 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 because of the operation of section 165-165 of the ITAA 1997. Company K disposed of an indirect equity interest, as defined in paragraph 165-12(9)(b) of the ITAA 1997, during the relevant ownership test period. The relevant interest disposed of by Company K was not a CGT asset. As a result of the disposal, Company K is not entitled to a deduction under Australian Income Tax law, but is entitled to a tax deduction in a foreign jurisdiction. No CGT event happened in relation to any direct or indirect equity interest in the Loss Company during the ownership test period.

Reasons for decision
Summary: 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) of the ITAA 1997 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. Note: * denotes a term defined in section 995-1 of the ITAA 1997 The deduction that Company K became entitled to in a foreign jurisdiction, because of the disposal of an indirect equity interest in Loss Company, is not taken into account in subsection 165-12(7) of the ITAA 1997 in determining the extent that the tax loss has been reflected, because it did not result from the happening of a CGT event. As no CGT event happened in relation to any direct or indirect equity interest in Loss Company during the ownership test period, more than 50% of the tax loss cannot be reflected for the purposes of subsection 165-12(7) of the ITAA 1997. Accordingly, Loss Company is taken by subsection 165-12(7) of the ITAA 1997 to have satisfied the conditions in 165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997 and it can therefore, deduct the relevant tax loss unless otherwise precluded by the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 The Act
Subject references: Losses Foreign tax laws