ATO ID 2003/781: Deducting tax loss: saving rule - disregarded capital loss from disposal of a pre-CGT equity interest
Date of decision: 17 July 2003
Year of income: Year ended 30 June 2004
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 respect of a capital loss that is disregarded because the asset was acquired before 20 September 1985?

Decision
No. For a tax loss to be reflected in a capital loss in respect of a direct or indirect equity interest the capital loss must be allowed or allowable under the ITAA 1997 or the Income Tax Assessment Act 1936 .

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, only because of the operation of section 165-165. 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 disposal resulted in CGT event A1 happening under subsection 104-10(2). As the relevant interest disposed of by Company K was acquired by it before 20 September 1985, the capital loss made by it was disregarded under subsection 104-10(5) of the ITAA 1997. No other CGT event happened in relation to any direct or indirect equity interest in 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) is not satisfied, only because of the operation of section 165-165 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 made by Company K in respect of the disposal of its equity interest is disregarded such that it is not recognised under Australian Income Tax law, the disposal is not taken to have reflected the tax loss incurred by Loss Company. As no other 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) 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: Tax loss Saving rule