Deducting Tax Loss: saving rule - equity interest owned by an individual

In applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997), are CGT events in respect of equity interests held by individuals taken into account in determining the extent that a Loss company's tax loss has been 'reflected'?

Yes. The definition of direct or indirect equity interests in subsection 995-1(1) of the ITAA 1997 does not exclude from the operation of subsection 165-12(7) of the ITAA 1997 direct or indirect equity interests on the basis that they are owned by individuals.

Loss Company seeks to deduct a tax loss that it had incurred in an earlier income year.

The 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.

During the relevant ownership test period, an individual 'D' disposed of an indirect equity interest in the Loss Company, as defined in subsection 995-1(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 D became entitled to a capital loss in respect of the disposal of the relevant indirect equity interest in the Loss Company.

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 section 995-1(1) of the ITAA 1997.

For the purposes of applying subsection 165-12(7) of the ITAA 1997, the terms 'direct equity interests' and 'indirect equity interests' are defined in subsection 995-1(1) of the ITAA 1997 as follows: (9) For the purposes of subsections (7) and (8): direct equity interests in a company are *shares in the company; and indirect equity interests: an entity has indirect equity interests in a company if it has *shares or other interests in entities interposed between the entity and the company.

As the above definitions do not exclude equity interests owned by individuals, D's indirect equity interest in Loss Company that was subject to a CGT event in the relevant ownership test period, must be taken into account in determining the extent that Loss Company's tax loss has been reflected.

[HISTORY: This ATO ID has been amended to include the (*) asterisk when reference is made in subsection 165-12(7) of the ITAA 1997 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.]