ATO ID 2003/391: Deducting tax loss: saving rule - reflected effects on direct and indirect equity interests to be combined
Date of decision: 28 March 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), is the 'less than 50% of the tax loss' test to be done separately for indirect equity interests, and direct equity interests, in determining the extent that a loss company's tax loss has been 'reflected'.

Decision
No. A condition in subsection 165-12(2), (3) or (4) of the ITAA 1997 will only be taken by subsection 165-12(7) of the ITAA 1997 to have been satisfied where less than 50% of a tax loss has been reflected in indirect equity interests and direct equity interests combined, not separately.

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 Company K disposed of an indirect equity interest, 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, Company K became entitled to a capital loss in respect of the disposal of the relevant indirect equity interest. Company K's capital loss reflected 30% of Loss Company's tax loss. During the relevant ownership test period, Company R disposed of a direct equity interest, as defined in subsection 9951(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, Company R became entitled to a capital loss in respect of the disposal of the relevant direct equity interest. Company R's capital loss reflected 40% of Loss Company's tax loss. Neither Company K's nor Company R's capital loss is taken to be disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.

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. In applying the 'less than 50%' test in subsection 165-12(7) of the ITAA 1997, the extent that Loss Company's tax loss has been reflected is ascertained by determining the extent of reflection in indirect equity interests and direct equity interests. As 70% of Loss company's tax loss has been reflected, subsection 165-12(7) of the ITAA 1997 will not deem that Loss Company has satisfied the conditions in subsections 165-12(2), (3) or (4) of the ITAA 1997. Accordingly, Loss Company cannot deduct the relevant tax loss under section 165-12 of the ITAA 1997.

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 Capital gains tax Capital losses CGT event A1 - disposal of a CGT asset CGT events Companies Deductions & expenses Entities & taxpayer groups Group companies Group companies loss transfers Group companies transfers Losses Prior year losses