Issue
In applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997) is an unrealised capital loss in respect of an equity interest in the loss company to be taken into account in determining the extent that a loss company's tax loss has been 'reflected'?
Decision
No. Subsection 165-12(7) only takes into account capital losses that occur, or could occur in the future, because of the happening of a CGT event in the relevant ownership test period.
Facts
Loss Company seeks to deduct a tax loss that it incurred in an earlier year of income.
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.
Company K owned an indirect equity interest in Loss Company, as defined in paragraph 165-12(9)(b) of the ITAA 1997, during the relevant ownership test period.
At the end of the ownership test period, Company K had an unrealised loss in respect of its indirect equity interest, because Loss Company's tax loss had had an adverse effect upon the market value of the interest.
Reasons for Decision
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 or indirect equity interests in the company during the *ownership test period. *denotes a term defined in section 995-1 of the ITAA 1997.
As no CGT event happened in relation to Company K's indirect equity interest in Loss Company during the ownership test period, Company K's unrealised capital loss in respect of that interest, is not taken into account in applying subsection 165-12(7) of the ITAA 1997.