Tax Tip 274: Wash Sales, Part IVA and CGT

The phase ‘wash sale’ loosely refers to the sale and repurchase of the same or similar assets in a short period of time. Sometimes this may be done with the aim of avoiding CGT by utilising a capital loss yet keeping the same assets.


Example

Homer owns $100,000 worth of ABC shares which are not worth $150,000 and he wishes to sell, but the sale would trigger a capital gain of $50,000

To avoid this Homer also sells $50,000 worth of DEF shares which he bought for $100,000. This would trigger a capital loss of $50,000

-$50,000 plus $50,000 = $0 so there would be no gain or loss overall if this was done.

But Homer thinks the DEF shares will jump in value soon so he sells them for $50,000 and buys them back the next day for $50,000.


This is a classic wash sale that the ATO is concerned about because it reduces the immediate CGT but results in the same assets being held – the DEF shares in this case.


Where the ATO deems the disposal to be a wash sale, the Commissioner can use his powers of under Pat IVA to deny or cancel out any tax advantage associated with the scheme. In the above example, Homer could still be deemed to have made a $50,000 capital gain


TR 2008/1

Income tax: application of Part IVA of the Income Tax Assessment Act 1936 to ‘wash sale’ arrangements

Legal Database

 

So it’s not wise to take a CGT bath then?

 

It could be. depends on the circumstances.

 

As a retiree drawing income mainly from my smsf how about selling shares held in my name at a profit and then repurchasing. The CG is declared but will not trigger a tax liability (taxable income including the CG under $18,600 threshhold). This appears to reset the cost of the shares so that if, in the future, a more impressive CG is achieved part of the profit will have already been dealt with tax wise and so the future tax liability will be reduced compared to not selling and repurchasing.

Could this arrangement be caught by the wash provisions?

 

That is what I call the CGT harvesting strategy. Unlikely to be a wash sale as there is no tax advantage immediately.

 

Hi @Terry_w. Thanks.
I am reading through the TR 2008/1.

I was wondering if I can buy back the shares after a period of time (say 30, 90 or 180 days, etc). Is there an exact number days?

I think there are a couple of moving parts that may further impact the share prices: FED / RBA interest rates, CPI, PCE numbers so I am expecting to buy them lower. Is that an explanation ATO is happy with?

Thanks

 

You can do what you like and there is no periods involved. You just have to ask yourself why you are doing it. If the dominant reason is to gain a tax advantage you could be in a spot of bother if you are audited as the ATO could cancel out that tax advantage.

 

They key issue is not defined. The issue is subject to broad anti-avoidance rules which consider a arrangement that could be a scheme which is undertaken for a predominant purpose of producing a tax benefit. Time does erode concern. The tax ruling on the holding period for shares says as much where risk exposure can count.

 

Thank you @Paul@PAS and @Terry_w

 

Hi @Terry_w

I'm curious about the following scenario:

If Homer had $100,000 of shares in Stock XX and ZZ.

He sells the $100,000 (at a profit). Debt recycles the 100k in a split loan and together Home and Marge re-purchase approx 100k of stock XX and ZZ in a joint brokerage account.

Does selling a re-buying in a new 'structure' (joint instead of sole owned brokerage) have any impact on potential wash sale status? I acknowledge you can comment provide general advice.

 

The question to ask is is ther. A tax advantage

 

Thanks Terry. That's what I'm continuing to wonder too.

I think there's arguments for both sides, pending each spouses specific details. I'll look in to it further. Thanks

 

These tax rules make it harder for the small Aussie investor to get ahead. The odds are stacked against ya.

You can’t do this, you can’t do that, wait 45 days blah blah blah. Thank the lord we still got neg gear and discount CGT and imputation credits. Otherwise who’d bother investing.

 

Don’t be scared of things that aren’t scary

 

It may be a reasonable defence to the arguement its a wash sale as there is a defence to the apparent "scheme". A wash sale is dealtt with under Part IVA so there firstly must be a tax benefit then the predominant purpose must be to seek that tax benefit. Legal and other reasons may limit that predominance. . ..Changing ownership to better reflect shared income for shared risks. However it could also be argued that both spouses are at risk if the shares are in one legal name as its marital property anyway.. But to change ownership to split the income seems a acceptable purpose. You would be mad not to. But the issue is also one of timing. If this occurred 28 June its more a concern. If it happended 1 July its not. If its a taxable gain its NOT a concern v triggerring a wash sale to apply losses to other gains...Thats the ""wash"" issue.

Selling down at a profit then repurchasing using borrowed funds doesnt seem like a Part IVA concern for a wash sale. There is no tax benefit. There may be tax payable. BUT if there was a cfwd loss of $100K or accrued losses in the year of $100K this may be different. BUT ...Is there a tax benefit ? Not really. Tax payable doesnt rise or fall. The loss is merely used. Taxpayers can choose how they purchase and whether they use cash or borrowed funds. Just as they can make mistakes using borrowed money and lose deductions they can create a deduction if they choose.

I once had a taxpayer pinged by the ATO for a wash sale who asked for advice. I really couldnt see what argument to raise. The taxpayer literally sold enough shares on 28 June to cover the taxable gains made earlier in the year to the exact dollar. He didnt even sell all the shares down. He held say 2000 CBA and sold down 432 then bought 432 within minutes. It looked like a wash sale and he was caught. ATO found it when they asked for a copy of his commsec account. The trigger was how he reported it too. He reported no gain, no loss. He should have reported a gain of $400 and a loss of $400 for example but he didnt. Why did he not ? Because it would have looked like a wash sale... yes it did.

 

Wow that is a blantant wash sale. Selling shares, paying CGT and then borrowing to buy back the same shares is a lot different. But I think there is still a risk or Part IVA being applied as it is a scheme and the only reason it is being done is to be able to claim the interest. Therefore there should be other dominant reasons to do it besides tax.