Deducting tax loss: saving rule - whether 'reflected' effects of capital losses, deductions and reduced assessable Income considered separately

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), are capital losses, deductions and reduced assessable income in respect of CGT events in relation to direct and indirect equity interests considered separately?

No. The extent of reflection is referable to the total amount of duplication in relation to the tax loss that has or could in future occur by way of capital losses, deductions and/or reduced assessable income, because of the happening of CGT events in relation to equity interests in the loss company in the ownership test period.

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 subsections165-12(2), 165-12(3) and 165-12(4) of the ITAA 1997 are not satisfied only 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, three indirect equity interests in Loss Company, were subject to the happening of separate CGT events after the end of the loss year.

Firstly, as a result of the happening of CGT event A1 Company K became entitled under subsection 104-10(4) of the ITAA 1997 to a capital loss. That capital loss reflected 30% of the tax loss.

Secondly, Company R as a result of the happening of CGT event A1 incurred a deduction that was greater than it otherwise would have been but for Loss Company having incurred the tax loss. The deduction reflected 20% of the tax loss.

Thirdly, Individual D as a result of the happening of CGT event A1 made a capital gain under subsection 104-10(4) of the ITAA 1997 that was less than it otherwise would have been but for Loss Company having incurred the tax loss. The reduced assessable income reflected 25% of the tax loss.

The capital loss, deduction and capital gain were not subject to a roll-over or disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.

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 conclude 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 term 'deductions, capital losses or reduced assessable income' in subsection 165-12(7) of the ITAA 1997 is to be interpreted in a conjunctive sense as meaning 'deductions and/or capital losses and/or reduced assessable income'.

Accordingly, as 75% of the tax loss has been reflected, subsection 165-12(7) will not deem the conditions in subsections 165-12(2) to (4) (inclusive) of the ITAA 1997 to be satisfied in this instance.