ATO ID 2010/63: Deducting tax loss: saving rule - limit on extent that the tax loss can be reflected
Date of decision: 1 March 2010
Year of income: Year ended 30 June 2010
Business line: Public Groups and International

Issue
In applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997), does the amount of a capital loss made in respect of a CGT event, in relation to an equity interest in the Loss Company, constitute an upper limit on the extent that the particular CGT event may have 'reflected' the tax loss?

Decision
No. The CGT event may also further reflect the tax loss through reduced assessable income where the non-inclusion of a capital gain that otherwise would have been made under that event could mean that a lesser or no net capital gain is included in assessable income for an income year.

Facts
Loss Company seeks to deduct a tax loss that it had incurred in an earlier income year. The conditions in subsections 165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997 are not satisfied, only because of the operation of the same share or interest rule in 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 a direct equity interest in Loss Company, as defined in subsection 995-1(1) of the ITAA 1997. The disposal resulted in CGT event A1 in section 104-10 of the ITAA 1997 happening. Applying the cost base provisions in Division 110 of the ITAA 1997, the cost base and reduced cost base of that equity interest, as at the time of the CGT event, was $800 The proceeds received by Company K from the disposal were $100. The economic loss that produced the tax loss incurred by Loss Company has also caused a decrease in the market value of Company K's direct equity interest in Loss Company from $1,000 to $100. Company K made a $700 capital loss under subsection 104-10(4) of the ITAA 1997 on the disposal of the equity interest.

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: * denotes a term defined in subsection 995-1(1) of the ITAA 1997. As a result of the economic loss that produced the tax loss incurred by Loss Company, the $200 assessable capital gain that Company K would otherwise have made from the disposal of its interest in Loss Company changed to a $700 capital loss. As provided by ATO ID 2003/535, for subsection 165-12(7) of the ITAA 1997 the extent that a tax loss has been reflected is determined by taking into account the combined extent that the tax loss has or will be reflected by way of capital losses, reduced assessable income and deductions. Accordingly, the disposal of Company K's interest in Loss Company fully reflects the tax loss of $900. This is through the $700 capital loss that occurs in the income year of the CGT event, and the $200 reduced assessable income that results, or could result in the future, from the exclusion of the $200 capital gain in working out a net capital gain or net capital loss for the income year under the method statements in sections 102-5 and 102-10 of the ITAA 1997. This is the case even if a single CGT event in relation to an equity interest causes both a capital loss and reduced assessable income

Legislative references: Income Tax Assessment Act 1997 section 102-5 section 102-10 subsection 104-10(4) Division 110 Division 165 subsection 165-12(1) subsection 165-12(2) subsection 165-12(3) subsection 165-12(4) subsection 165-12(7) section 165-165 subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2003/535 | ATO ID 2003/1111 (withdrawn)
Subject references: Capital losses Ownership test period Saving rule Tax loss