ATO ID 2003/500: Deducting tax loss: saving rule - indirect equity interest subject to two CGT events in the ownership test period
Date of decision: 8 May 2003
Year of income: Year ended 30 June 2001
Business line: Public Groups and International

Issue
Where two separate CGT events happen in relation to an indirect equity interest in a loss company during the relevant ownership test period (but after the loss year) is a capital loss from the second CGT event taken into account in determining the extent to which the loss company's tax loss has been 'reflected' for the purposes of applying subsection 165-12(7) of the Income Tax Assessment Act 1997 (ITAA 1997) if no roll-over occurred in relation to the first CGT event?

Decision
No. As the first CGT event in relation to the indirect equity interest in the loss company happened after the end of the loss year, and was not subject to a roll-over, the amount of capital loss resulting from the happening of the second CGT event to that interest, is unaffected by the tax loss and therefore cannot have reflected it.

Facts
Loss Company seeks to deduct a tax loss 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, an indirect equity interest in Loss Company was subject to the happening of two separate CGT events after the end of the loss year. The first CGT event happened when Company K disposed of the indirect equity interest to Company R, resulting in a capital loss under subsection 104-10(4) of the ITAA 1997 because of CGT event A1. The second CGT event happened when Company R disposed of the same interest to Individual D, resulting in a capital loss under subsection 104-10(4) of the ITAA 1997, again because of CGT event A1. Neither capital loss was subject to a roll-over or disregarded under Subdivision 170-D of the ITAA 1997 or any other provision. As a result of Loss Company having incurred the relevant tax loss, Company K made a greater capital loss than it otherwise would have.

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 first CGT event in relation to the indirect equity interest was not subject to a roll-over or otherwise disregarded, the capital loss made by Company K will reflect Loss Company's tax loss as the capital loss is more than it otherwise would have been because of the tax loss. The calculation of the capital loss made by Company R from the happening of the second CGT event is unaffected by the relevant tax loss. [HISTORY: This ATO ID has been amended to include the (*) asterisk when reference is made in subsection 165-12(7) to direct equity interests and indirect equity interests having been made defined terms under subsection 995-1(1) of ITAA 1997. The amendment also removes from the ATO ID any reference to subsection 165-12(9) of the ITAA 1997 repealed by the Tax Laws Amendment (2007 Measures No 4) Act 2007 with effect from 24 September 2007.]

Legislative references: Income Tax Assessment Act 1997 subsection 104-10(4) subsection 165-12(1) subsection 165-12(2) subsection 165-12(3) subsection 165-12(4) subsection 165-12(7) section 165-165 section 995-1 Subdivision 170-D
Subject references: Capital losses Losses and Capital Gains Tax CoE Net capital losses