ATO ID 2003/394: Deducting tax loss: saving rule - capital loss in respect of equity interest no longer disregarded under Subdivision 170-D
Date of decision: 17 April 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
In determining the extent that a tax loss has been reflected for the purposes of applying subsection 165-12(7) of the Income Tax Assessment Act 1997 (ITAA 1997), is a capital loss in relation to an indirect equity interest in the loss company that is taken to be made under section 170-275 of Subdivision 170-D of the ITAA 1997 during the relevant ownership test period, to be taken into account?

Decision
No. Only the associated capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997 is to be taken into account in applying subsection 165-12(7) of the ITAA 1997.

Facts
Loss Company seeks to deduct a tax loss that it has made 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 in Loss Company, as defined in subsection 995-1(1) of the ITAA 1997, to Company R. That 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 the disposal year in respect of the disposal of the relevant indirect equity interest. That capital loss was disregarded under subsection 170-270(1) of Subdivision 170-D of the ITAA 1997. Subsequently, during the ownership test period, Company R disposed of the same indirect equity interest in Loss Company which resulted in section 170-275 of the ITAA 1997 applying, such that Company K as originating company, was then taken to have made a capital loss at that time equivalent to that disregarded capital loss.

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) 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 assume 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. The capital loss that Company K was taken to have made under section 170-275 of the ITAA 1997 is not taken into account in determining the extent that the tax loss has been 'reflected' for the purposes of applying subsection 165-12(7) of the ITAA 1997 as the associated capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997 is to be taken into account. (Refer ATO ID 2003/395). Note: Had the capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997, pre-dated the ownership test period, the capital loss that Company K was taken to have made under section 170-275 would still not be taken into account in applying subsection 165-12(7) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 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 Subdivision 170-D subsection 170-270(1) section 170-275 Subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2003/395
Subject references: Capital losses Deferral event Deferred capital losses Disregarded capital loss Losses and Capital Gains Tax CoE Net capital losses Originating company