ATO ID 2003/393: Deducting tax loss: saving rule - capital loss in respect of equity interest rolled-over under Subdivision 126-B
Date of decision: 22 April 2003
Year of income: Year ended 30 June 2001
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 relation to an indirect equity interest in the loss company that is rolled-over under Subdivision 126-B of the ITAA 1997 during the relevant ownership test period, to be taken into account?

Decision
No. The roll-over of a capital loss under subsection 126-60(1) of the ITAA 1997 does not result in a capital loss that has, or could in future, be reflected for the purposes of applying subsection 165-12(7) of the ITAA 1997.

Facts
Loss Company seeks to deduct a tax loss in the year of income ended 30 June 2001 that it 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. During 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. That 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 rolled over under Subdivision 126-B of the ITAA 1997. As a consequence, subsection 126-60(1) of the ITAA 1997 provided that the capital loss was disregarded.

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. As the capital loss that Company K made in respect of the disposal of an indirect interest in Loss Company was permanently disregarded under subsection 126-60(1) of the ITAA 1997, it is not to be taken into account in determining the extent that the tax loss has been reflected for the purposes of applying subsection 165-12(7) of the ITAA 1997, as there is no capital loss that 'could occur in future'. Instead, pursuant to subsection 126-60(2) of the ITAA 1997, a consequence of the roll-over was that the cost base and reduced cost base of the relevant shares (indirect equity interest) acquired by recipient company (Company R) were both deemed to have the same first element as they had in the hands of the originating company (Company K). For a capital loss to 'could occur in future' it must, as with subsection 170-270(1) of Subdivision 170-D of the ITAA 1997, only be deemed to be temporarily disregarded until the happening of a future event, as is the case with section 170-275 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 104-10(2) Subdivision 126-B subsection 126-60(1) subsection 126-60(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)
Subject references: Capital losses Deferral event Deferred capital losses Disregarded capital loss Losses and Capital Gains Tax CoE Net capital losses Originating company