ATO ID 2003/67: Deferred capital loss or deduction: greater than 50% interest - partial reacquisition by originating company
Date of decision: 14 January 2003
Year of income: Year ending 30 June 2003
Business line: Public Groups and International

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
Summary: 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.

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
Subject references: 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