Deducting tax loss: saving rule - capital loss unable to be applied

In applying subsection 165-12(7) of the Income Tax Assessment 1997 (ITAA 1997) is a capital loss in respect of the disposal 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' where the disposer, a company, is unable to apply the capital loss?

Yes. A loss company's tax loss is reflected in the amount of capital loss that is made in relation to the disposal of the equity interest and is not dependent upon the capacity of the disposer to apply that capital loss.

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 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, 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, Company K became entitled to a capital loss in respect of the disposal of the relevant indirect equity interest.

That capital loss is not taken to be disregarded under Subdivision 170-D of the ITAA 1997 or any other provision.

However, Company K cannot apply that capital loss because it is unable to satisfy the relevant continuity of ownership or same business tests in Division 165 of the ITAA 1997.

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.

Because the happening of CGT event A1 entitled Company K to the relevant capital loss, that is not disregarded, the capital loss is to be taken into account in determining the extent to which the tax loss incurred by Loss Company has been reflected.

In applying subsection 165-12(7) of the ITAA 1997 it is irrelevant that Company K is unable to apply its capital loss. Note: This ATO ID has been amended to remove any reference to subsection 165-12(9) of the ITAA 1997. Subsection 165-12(9) of the ITAA 1997 was repealed by the Tax Laws Amendment (2007 Measures No 4) Act 2007 (Act 143 of 2007) with effect from 24 September 2007. The Amending Act transfers the meaning of 'direct and indirect equity interests', previously contained in subsection 165-12(9) of the ITAA 1997 to subsection 995-1(1) of the ITAA 1997. However, this change does not affect the decision in this interpretative decision.