The ATO have released a taxation ruling which considers the strategy of wash sales and shares. Wash sales include situations where a person contrives to reduce tax by selling assets in such a way that results in a reduction of tax payable.
They include arrangements where a taxpayer (individual, entity or superannuation fund) sells an asset to make a capital loss and then within a short period after, reacquires the same asset. This has been a more recent strategy where taxpayers make a capital gain on the disposal of an asset during the year. Given the recent share market fluctuations, there have been opportunities to sell shares at low values, thereby crystallising a capital loss and then repurchasing them on the market at the lower cost. The capital loss from the shares reduces the capital gain made on other assets in a financial year and reduces the amount of income tax payable.
The ATO has issued its position where a person enters into a scheme to reduce their tax liability by selling shares or other assets to make a loss and then repurchases the asset within a short period of time. The situations in which this is done with the sole or dominant purpose of generating a capital loss to offset a capital gain concerns the ATO. Where you cannot prove that this was not the dominant purpose of the transaction, the ATO will deny the capital loss applied against the capital gain and apply penalties.
Whilst there may be valid reasons particularly in the stock market to liquidate stocks which have a declining value, it is important that if you subsequently decide to repurchase those same stocks, you have a legitimate reason for doing so. Otherwise, where you receive a reduction in income tax payable as a result of such capital losses, the ATO can deny the application.
If you are unsure whether recent transactions will be flagged by the ATO, contact us on 07 3833 3999.