Deducting tax loss: saving rule - capital loss in respect of equity interest no longer disregarded under Subdivision 170-D

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 a capital loss in relation to an indirect equity interest in the loss company that is taken to be made under section 170-275 of Subdivision 170-D of the ITAA 1997 during the relevant ownership test period, to be taken into account?

No. Only the associated capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997 is to be taken into account in applying subsection 165-12(7) of the ITAA 1997.

Loss Company seeks to deduct a tax loss that it has 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, Company K disposed of an indirect equity interest in Loss Company, as defined in subsection 995-1(1) of the ITAA 1997, to Company R. That disposal resulted in CGT event A1 happening under subsection 104-10(2) of the ITAA 1997.

Because of the happening of CGT event A1, Company K became entitled to a capital loss in the disposal year in respect of the disposal of the relevant indirect equity interest.

That capital loss was disregarded under subsection 170-270(1) of Subdivision 170-D of the ITAA 1997.

Subsequently, during the ownership test period, Company R disposed of the same indirect equity interest in Loss Company which resulted in section 170-275 of the ITAA 1997 applying, such that Company K as originating company, was then taken to have made a capital loss at that time equivalent to that disregarded capital loss.

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.

The capital loss that Company K was taken to have made under section 170-275 of the ITAA 1997 is not taken into account in determining the extent that the tax loss has been 'reflected' for the purposes of applying subsection 165-12(7) of the ITAA 1997 as the associated capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997 is to be taken into account. (Refer ATO ID 2003/395).

Note: Had the capital loss that was disregarded under subsection 170-270(1) of the ITAA 1997, pre-dated the ownership test period, the capital loss that Company K was taken to have made under section 170-275 would still not be taken into account in applying subsection 165-12(7) of the ITAA 1997. [HISTORY: This ATOID has been amended to include the (*) asterisk in subsection 165-12(7) that is a minor amendment to the provisions providing useful interpretation with reference to direct equity interests and indirect equity interests by making them 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) repealed by the Tax Laws Amendment (2007 Measures No 4) Act 2007 with effect from 24 September 2007.]