Issue
Where a 'relevant CGT asset' (as defined in paragraph 170-275(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)) is split into two 'new assets' (as defined in paragraph 112-25(1)(a) of the ITAA 1997) can the disposal of one of the new assets cause a new event to happen for the purposes of paragraph 170-275(1)(b) of the ITAA 1997?
Decision
Yes. The reference to 'a greater than 50% interest in it' in paragraph 170-275(1)(b) of the ITAA 1997 focuses on the interest in the underlying property or right that constituted the relevant CGT asset.
Facts
An 'originating company' (as defined in paragraph 170-255(1)(a) of the ITAA 1997) disposed of a CGT asset to another entity.
The disposal of the CGT asset resulted in section 170-255 of the ITAA 1997 applying. As a consequence, a capital loss that the originating company would otherwise have been entitled to, was disregarded under section 170-270 of the ITAA 1997.
Subsequently, the relevant CGT asset acquired by the other entity was split into two new assets.
The split into two new assets did not involve any change in beneficial ownership of the underlying property that constituted the CGT assets.
Pursuant to subsection 112-25(3) of the ITAA 1997, the cost base and reduced cost base of the relevant CGT asset were calculated as being allocated 60% to the first new asset and 40% to the second new asset respectively.
The other entity later disposed of the 60% new asset to an unrelated entity that, at the time of acquiring that asset, was none of those mentioned in subparagraphs 170-275(1)(b)(i), (ii) or (iii) of the ITAA 1997.
Reasons for Decision
Where a capital loss has been disregarded under section 170-270 of the ITAA 1997 the originating company is taken to have made an equivalent capital loss where a 'new event' happens under section 170-275 of the ITAA 1997.
Paragraph 170-275(1)(b) of the ITAA 1997 provides that a new event happens where the relevant CGT asset, or a greater than 50% interest in it, is acquired by an entity that is none of the following: (i) a member of the linked group of which the originating company is a member; (ii) a connected entity of the originating company; (iii) an associate of such a connected entity.
The reference to 'a greater than 50% interest in it' in paragraph 170-275(1)(b) of the ITAA 1997 is focussing upon the interest in the underlying property or right that constituted the relevant CGT asset.
The acquisition of the new asset, which constituted a 60% interest in the relevant CGT asset, by an entity that was none of those mentioned in subparagraphs 170-275(1)(b)(i), (ii) or (iii) of the ITAA 1997, results in paragraph 170-275(1)(b) of the ITAA 1997 being satisfied.
Consequently, a new event happens for the purposes of subsection 170-275(1) of the ITAA 1997 and the originating company is taken to have made a capital loss equal to the whole of the amount of the capital loss that was disregarded by section 170-270 of the ITAA 1997.
Note 1: If, within 4 years after the occurrence of the new event, a 'further event' (as defined in subsection 170-280(1) of the ITAA 1997) occurs, then subsection 170-280(2) of the ITAA 1997 will apply so that the originating company will be taken not to have made the capital loss allowed by section 170-275 of the ITAA 1997.
Note 2: The term 'a greater than 50% interest in it' in paragraph 170-280(3)(a) of the ITAA 1997 is to be interpreted consistently with the interpretation used in applying paragraph 170-275(1)(b) of the ITAA 1997 given in this ATO Interpretative Decision.