Deemed acquisition for CGT on Shares on becoming Tax Resident

https://www.ato.gov.au/individuals/...gains-tax/how-changing-residency-affects-cgt/

For someone who becomes a tax resident, for CGT purpose the share-portfolios will be assessed deemed acquisition of "market value" on the day of arrival, and not "cost base". I have a question if window dressing this is legit or not in ATO's eyes. Say the market valuation prior to return is much lower than my actual cost base, can I dispose all shares the day before become a resident, and re-purchase them the day after becoming a resident. Basically to avoid poor water-mark for CGT purpose. (example: purchased at 1mio, value is 700k before becoming tax resident. Then I'm 300k worse off for CGT purpose)

Obviously there is brokerage/market risks for this but better than paying CGT on unrealized loss. To me this is "legal" unless ATO has guidance/rules against this?

(If value >> cost base, this deemed acquisition works in my favor so obviously that won't apply)

 

Yes you can.

But you should be asking will the Commissioner use Part IVA to cancel out the tax benefits?
is it a wash sale? It certainly could be.

 

You use the word 'return'. This implies you were previously a tax resident? That makes things more complicated, doesn't it? i.e. depends on whether the shares were acquired during the previous period you were tax resident, or acquired during the period you were non-tax resident.

 

I will read that "Part IVA" further. Re: "Wash sale" I'm not sure how ATO define it, thus I will read further.

In my world (finance) "wash" sale implies no market risk is taken. Example is equity dividend swaps where underlying shares are swapped with a counterparty just over ex-dividend date and simultaneously enter a equity swap transaction to account for dividend payment to minimize tax.

In my case I'm taking a naked market risk for those few days of "in/out" so not sure if ATO will challenge me based on intends, or I have safe harbor on words of law.

 

Thanks good point - yes I was previously a tax resident but in this specific case I'm wondering about the shares that are procured as non resident post previous departure - thus no deemed disposal nor CGT referrals were made.

 

I dont see how a wash sale type arrangement changes anything.

The costbase IS the market value on the date the taxpayer commences Australian tax residency. This is determined by the market on that date. If the shares have a unrealised loss then that event cements it in place. Buying the shares at a non-market rate the day after would fall foul of the market value substitution rule which would reinstate the lower value as its market value. It is a anti-avoidance rule and seems very effective at such issues.

Of course this doesnt stop the other tax jursidiction from also taxing the same gain based on the $1m historical costbase and it may mean a CGT loss in one juridiction and a larger gain in the other.. Of course in the AU context the foreign exchange issue plays a part

 

What are the consequences if a sale and subsequent substantially identical purchase fits the definition of wash sale, but results in a gain?

 

A wash sale is one which produces a tax benefit and allows the Commissioner a remedy under Part IVA. Choosing to pay tax is not a Part IVA issue as there is no benefit.

I dont consider a non-resident can effect a wash sale PRIOR to commencing residency. The investment only becomes a CGT asset due to operation of the deemed acquisition rule. Its very purpose. Anything prior isnt a matter within Australian tax law. The cost base IS the market value. One of the few things the taxpayer has control over is 1. Selling prior to commencing residncy or 2. The date and thefore value of the deemed acqusition.

One way to effect such a change is to consider a tax entity aquisition (ie a trust or company) not person ownership PRIOR to commencing residency. But using a non-arms length price may fall foul. However the overseas disposal should be considered.

 

non residents get some generous cgt concessions as well on sale of shares

 

Like no CGT on some shares, ETFs etc

 

yes good tax planning opportunities for those looking at changing residency status