ATO ID 2003/395: Deducting tax loss: saving rule - capital loss in respect of equity interest 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 respect of a CGT event in relation to an indirect equity interest in the loss company taken into account where it is disregarded under Subdivision 170-D of the ITAA 1997?

Decision
Yes. Subsection 165-12(7) of the ITAA 1997 takes into account capital losses that 'could occur in future' because of the happening of a CGT event in the relevant ownership test period.

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. In 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. 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, 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. In respect of that disregarded capital loss, there were no subsequent consequences in the ownership test period for Company K as 'originating company' that resulted in section 170-275 of the ITAA 1997 applying, such that it was taken to have made a capital loss 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 had disregarded under subsection 170-270(1) of the ITAA 1997 in respect of an indirect equity interest in Loss Company, is to be taken into account in determining the extent that the tax loss that Loss Company seeks to deduct has been reflected for the purposes of applying subsection 165-12(7) of the ITAA 1997. Company K 'could in future' become entitled to an equivalent capital loss under section 170-275 of the ITAA 1997, to the capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997. That possible future entitlement to an equivalent capital loss, directly results from the happening of the CGT event in which Company K disposed of an indirect equity interest in Loss Company to Company R, during the ownership test period.

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 2003/394
Subject references: Capital losses Deferral event Deferred capital losses Disregarded capital loss Losses and Capital Gains Tax CoE Net capital losses Originating company