ATO ID 2003/390: Deducting Tax Loss: saving rule - equity interest owned by an individual
Date of decision: 7 April 2003
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
In applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997), are CGT events in respect of equity interests held by individuals taken into account in determining the extent that a Loss company's tax loss has been 'reflected'?

Decision
Yes. The definition of direct or indirect equity interests in subsection 995-1(1) of the ITAA 1997 does not exclude from the operation of subsection 165-12(7) of the ITAA 1997 direct or indirect equity interests on the basis that they are owned by individuals.

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 because of the operation of section 165-165 of the ITAA 1997. During the relevant ownership test period, an individual 'D' disposed of an indirect equity interest in the Loss Company, as defined in subsection 995-1(1) of the ITAA 1997. The disposal resulted in CGT event A1 happening under subsection 104-10(2) of the ITAA 1997. Because of the happening of CGT event A1, individual D became entitled to a capital loss in respect of the disposal of the relevant indirect equity interest in the Loss Company.

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 section 995-1(1) of the ITAA 1997. For the purposes of applying subsection 165-12(7) of the ITAA 1997, the terms 'direct equity interests' and 'indirect equity interests' are defined in subsection 995-1(1) of the ITAA 1997 as follows: As the above definitions do not exclude equity interests owned by individuals, D's indirect equity interest in Loss Company that was subject to a CGT event in the relevant ownership test period, must be taken into account in determining the extent that Loss Company's tax loss has been reflected. [HISTORY: This ATO ID has been amended to include the (*) asterisk when reference is made in subsection 165-12(7) of the ITAA 1997 to direct equity interests and indirect equity interests having been made defined terms under subsection 995-1(1) of ITAA 1997. The amendment also removes from the ATO ID any reference to subsection 165-12(9) of the ITAA 1997 repealed by the Tax Laws Amendment (2007 Measures No 4) Act 2007 with effect from 24 September 2007.]

Legislative references: Income Tax Assessment Act 1997 subsection 104-10(2) section 165-12 subsection 165-12(2) subsection 165-12(3) subsection 165-12(4) subsection 165-12(7) section 165-165 subsection 995-1(1)
Subject references: Accumulated tax losses Prior year losses