ATO ID 2003/537: Deducting tax loss - saving rule - subvention payment for previous loss transfer
Date of decision: 23 June 2003
Year of income: Year ended 30 June 2002
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 the value of a subvention payment received by a loss company for transferring part of a tax loss taken into account?

Decision
No. As the transferred amount of tax loss that gave rise to the subvention payment is deemed by subsection 170-20(2) of the ITAA 1997 not to have been incurred by the loss company, any associated subvention payment is therefore not related to the defined tax loss that is being considered by subsection 165-12(7) of the ITAA 1997.

Facts
Loss Company incurred a $100 tax loss as calculated under subsection 36-10(4) of the ITAA 1997 in respect of the relevant loss year. In the subsequent income year Loss Company transferred $60 of the tax loss under Subdivision 170-A of the ITAA 1997. Loss Company received $18 of subvention payment because of that loss transfer. Loss Company seeks to deduct the remaining $40 tax loss in a later income year. The $40 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. In the relevant ownership test period, as defined in subsection 165-12(1) of the ITAA 1997, an individual R disposed of an indirect equity interest, as defined in subsection 995-(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 R became entitled to a capital loss in the disposal year in respect of the disposal of the relevant indirect equity interest. That capital loss is not 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 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 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 $18 subvention payment that Loss Company received from transferring the $60 amount of tax loss is not related to the $40 of remaining tax loss that Loss Company now seeks to deduct and therefore cannot be taken into account in determining the extent that the $40 tax loss has been reflected for the purposes of applying subsection 165-12(7) of the ITAA 1997. The $60 tax loss transferred by Loss Company is no longer deemed to have been incurred by it because of the operation of subsection 170-20(2) of the ITAA 1997.

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) paragraph 165-12(9)(b) section 165-165 Subdivision 170-A subsection 170-20(2) Subdivision 170-D
Subject references: Capital gains tax CGT event A1-disposal of a CGT asset Dealings & transactions Group company loss transfers Losses