Deducting tax loss: saving rule - value of taxation benefit from tax loss

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 the value of the taxation benefits associated with the tax loss taken into account?

Yes. The value of the benefits is taken into account to the extent that those benefits had increased the market value of direct or indirect equity interests in the loss company that were subject to a CGT event in the relevant ownership test period.

Loss Company incurred a tax loss calculated under subsection 36-10(4) of the ITAA 1997 in respect of the relevant loss year.

In a later income year, Loss Company seeks to deduct the tax loss.

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 only because of the operation of section 165-165 of the ITAA 1997.

In the relevant ownership test period, as defined in subsection 165-12(1) of the ITAA 1997, an individual R disposed of an indirect equity interest, as defined in paragraph 165-12(9)(b) 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 R became entitled to a capital loss in the disposal year 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.

No other CGT event happened in relation to any other direct or indirect equity interest in the Loss Company during the relevant ownership test period.

The market value of R's indirect equity interest in Loss Company as at the time of the happening of CGT event A1, was greater than it otherwise would have been because of the value of the taxation benefits that Loss Company was expected to receive from deducting the relevant tax 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 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 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 taxation benefits that Loss Company may receive from deducting a tax loss constitute an intangible asset in its hands that may affect the market value of equity interests in Loss Company.

To the extent that those taxation benefits increased the market value of R's indirect equity interest in Loss Company at the time that the interest was subject to a CGT event in the ownership test period, those benefits decreased the extent that the relevant tax loss was reflected for the purposes of applying subsection 165-12(7) of the ITAA 1997.