# ATO gets tougher on tax loss share sales



## sam76

SOARING house prices and plummeting share prices can tempt investors into seeking clever ways to cut their tax bill. 

One of the most popular strategies - selling then re-buying shares in a company to lock in a capital loss - has been a grey area for years, but has just been given a red card by the Australian Taxation Office. 

Hood Sweeney director of accounting and business services Matthew Fox said the ATO last month clarified its attitude to claiming tax losses from "wash sales'' and would deny any tax losses claimed this way. 

"A wash sale is described as a sale and purchase of the same asset within a short period of time where the sale and purchase cancel each other out and there is little or no change in the economic exposure of the owner of the asset,'' Mr Fox said. 

He said it had been a widely used strategy by people facing a capital gains tax bill who also had some assets where a capital loss would occur if they sold it - which could offset much or all of the gain. 

"For example, Pete has sold an investment property and made a $50,000 gain. In his share portfolio he has BHP shares that cost $70,000, but are now worth $50,000. His strategy is then to instruct his broker to sell the shares on the market and re-purchase them the next day. He then realises a loss of $20,000 which he uses to reduce the gain on the investment property.'' 

Mr Fox said the ATO's recent ruling was that if the main purpose of the wash sale was to obtain a tax benefit, the loss would be denied. 

"The loss will also be denied if Pete rather than re-purchasing in his name purchases the shares in a trust controlled by him,'' he said. 

Mr Fox said to avoid an ATO rejection, the investor would need to show another purpose other than the tax benefit, such as restructuring their affairs. 

"Other options to avoid this problem are to delay the re-purchase decision and to re-purchase based on market condition changes or independent market research, or to purchase an alternative stock, like Rio Tinto in Pete's case,'' he said. 

"Caution needs to be exercised if you are intending to realise an asset to crystallise a capital loss as the rules for deductability of the loss are now a lot stricter. You should seek the advice of a suitable qualified taxation advisor before implementing such a strategy.''


So how long is an acceptable time to buy back your shares??


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## barnz2k

no fair 

What if you buy them back soon but at a lower price, and your "intentions" to sell/buy were because of a drop.


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## GreatPig

barnz2k said:


> What if you buy them back soon but at a lower price, and your "intentions" to sell/buy were because of a drop.



As the article says:



> to avoid an ATO rejection, the investor would need to show another purpose other than the tax benefit



I would imagine that the purpose of making a profit by selling high and buying low should be valid, but then I'm not the ATO.

I'd also imagine that it would need to be a reasonably significant difference to back that up, so you might have a bit of "showing" to do if your intention was for there to be a significant difference but the market didn't let it happen.

What I'd like to know though is if I sell to lock in a capital gain and then immediately buy again, will they disallow the CGT so I don't have to pay it? After all, fair's fair - it should work the same both ways! 

GP


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## nioka

GreatPig said:


> After all, fair's fair - it should work the same both ways! GP



I don't believe the tax office has the word "fair" in any of it's rules. Fair to them is a four letter word. Just remember there are more ways to kill a cat than just choking it with butter.


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## gfresh

I can see the general intent, but if the ATO is allowing you to offset losses against gains, it seems harsh to impose the exact rules of when and what you can't do this. 

They mention the property one as the main example, which I would imagine is the main reason for their decision. Would also be a little easier to prove a more obvious link. Some would be screaming blue murder however, as it may be a key strategy.

I would hope if you could prove you're a trader, and regularly buy and sell shares, and you say you never consider capital gains considerations in your trading strategy - you wouldn't get grilled too much. Because as pointed out, it's regular practice to sell a share to buy it back at a lower price in short succesion, even on the same day. 

Likewise, sometimes you might actually want to lock in a share capital gain, to offset a current share loss - which I thought was the whole point off the offset allowance. 

Seems a little strange really considering that it seemed the whole idea of the CGT offset system was the freedom to allow you to decide the timing of your own CGT events   Maybe their final goal may be to separate CGT events into share, property and other investments, however that's going to make the whole system a lot more complicated.


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## theasxgorilla

Dodgy b@stards is all I can say.

It's not a grey area at all, it's purely %&/King wrong.  If you are capital gain neutral right this moment...and you sell one asset for a win, and another for a loss, and then decide to take a punt and buy back the losing asset, then that is your right.  If you are forced to hold, and decide later on to sell this losing asset, and you never make another capital gain in your life, you can't go back and offset the loss against the capital gain again, can you?  You have to wait for a future capital gain.

This is just a greedy ATO/gov making a snatch for tax to suit their own cashflow agendas.

Time to bump this thread, or what?

https://www.aussiestockforums.com/forums/showthread.php?t=5631

ASX.G


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## theasxgorilla

sam76 said:


> Mr Fox said to avoid an ATO rejection, the investor would need to show another purpose other than the tax benefit, such as restructuring their affairs.




This should be put into context so people understand how hypocrytical it really is.

Remind us again why we negative gear anything?  For the freaking tax benefit.

Extrapolate what they're saying here...if you make an investment that loses money in order to receive a tax benefit???  The entire 'investment property' market in Australia is based on this idea.

The "going offshore as fast as I can" ASX Gorilla.


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## Judd

Then push for the legislation to be changed or clarified.  The ATO apply the legislation as passed by Parliament and as interpreted by the lawyers (all of them).  So if it is crappy legislation blame the parliamentary legislation drafters and your politicians for allowing such trash to be out in public.

Oh, by the way, the matter about negative gearing is not a question of the ATO allowing it.  It was the result of a High Court decision many years ago.

And I am neither a public servant or a lawyer.

Cheers


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## Pager

for company's that have options trading, the alternative method is to use Call Options, that is sell your stock, claim the loss, buy long dated Calls, claim the premium cost as well.

You will miss out on dividends but you don't own the stock, only the right to buy them on or before expiry, if it goes up then you can either sell them for a profit or exorcise at the strike price, therefore getting your shares back, if they go down all you have lost is the premium of buying the option, unless you sell it before expiry at a lesser loss.


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## GreatPig

Pager said:


> You will miss out on dividends



Buy call warrants that entitle you to the dividends.

I have to agree though, the whole concept of supposedly not being able to do things just to claim a tax benefit is a bit of a joke. After all, that's exactly the reason many people use a tax agent rather than do their own tax.

I can just see the audit:

ATO: Why did you go to a tax agent?
Taxpayer: Because they said they could get me a refund.
ATO: Wrong! Part IVa - bye bye refund.

GP


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## reece55

GreatPig said:


> Buy call warrants that entitle you to the dividends.
> 
> I have to agree though, the whole concept of supposedly not being able to do things just to claim a tax benefit is a bit of a joke. After all, that's exactly the reason many people use a tax agent rather than do their own tax.
> 
> I can just see the audit:
> 
> ATO: Why did you go to a tax agent?
> Taxpayer: Because they said they could get me a refund.
> ATO: Wrong! Part IVa - bye bye refund.
> 
> GP



The entire Part IVa section is a joke in my experience. 

It's basically a license for the commissioner to subjectively assess whether, in the ATO's eyes, you are worth prosecuting because they feel like whilst you correctly interpreted the law, it gives you a favorable outcome! What a crock of ^&*(. As if our super complicated tax laws weren't already a joke.

As someone who prepares tax returns, I look forward to more reviews (sarcasm). The ATO are increasingly reviewing items in tax returns and it just makes life more difficult for the tax practitioner and client. 

Cheers


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## theasxgorilla

reece55 said:


> The entire Part IVa section is a joke in my experience.
> 
> It's basically a license for the commissioner to subjectively assess whether, in the ATO's eyes, you are worth prosecuting because they feel like whilst you correctly interpreted the law, it gives you a favorable outcome! What a crock of ^&*(. As if our super complicated tax laws weren't already a joke.




Yes... although some do-gooder matyrs still don't think the deck is stacked against them.  Doing the devils work, bless their ignorant souls.

ASX.G


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## Hyperion

Pager said:


> for company's that have options trading, the alternative method is to use Call Options, that is sell your stock, claim the loss, buy long dated Calls, claim the premium cost as well.
> 
> You will miss out on dividends but you don't own the stock, only the right to buy them on or before expiry, if it goes up then you can either sell them for a profit or exorcise at the strike price, therefore getting your shares back, if they go down all you have lost is the premium of buying the option, unless you sell it before expiry at a lesser loss.




TR 2008/1 [4]
"the taxpayer disposes of, or deals with, the asset and at the same time, or within a short period after, acquires the same or substantially the same asset; "

perhaps a call option (or call warrant) would fall under the category of "substantially the same asset"?


Out of interest - GreatPig, reece55 - do either of you work in the tax industry? (or anyone else here?)


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## GreatPig

Hyperion said:


> GreatPig ... do ... you work in the tax industry?



Not officially, but everyone does to some extent.

Over the last few years, I've had to read up more on tax issues than I have on work-related stuff for my day job.

And boy does it suck. I don't know how tax agents manage to stay awake! 

GP


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## sam76

Maybe time to bring this one up again....

(read first post)


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## Duckman#72

Good idea Sam.

Don't forget that this will be the first year that the ATO has access to the ASX transaction database and therefore everyone's share transactions.

Definition of a "wash sale" can be argued and there can be a number of reasons for selling and buying....however, my advice to make it easier on yourself - don't be an *obvious* wash sale. Don't sell and buy back on exactly the same day and don't sell and buy back the same number of shares. The ATO will undoubtedly have parameters set with their searches however - cases like that will raise a red flag to start with.

Arguments about comparing wash sales to negative gearing don't make sense either. The dominant purpose of holding a rental property is not tax minimisation. Sure, it is a major benefit - but so is wealth accumulation, income earning potential, investment diversification etc.   

On the "wash sale" example I gave above. It would be difficult to explain why you would be selling shares and buying the same ones back, at the same amount, on the very same day, other than to crystalise the tax losses.

Duckman


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## doctorj

Duckman#72 said:


> Arguments about comparing wash sales to negative gearing don't make sense either. The dominant purpose of holding a rental property is not tax minimisation. Sure, it is a major benefit - but so is wealth accumulation, income earning potential, investment diversification etc.



If it wasn't for negative gearing, most people with IP wouldn't hold them because they'd have nothing to justify the loss they'd be making year on year   Another story for another thread...



Duckman#72 said:


> On the "wash sale" example I gave above. It would be difficult to explain why you would be selling shares and buying the same ones back, at the same amount, on the very same day, other than to crystalise the tax losses.



My advice to anyone that is worried that a sale may appear as a "wash sale" is to document your reasons for placing the sell order and then document your reasons for buying later.  These notes should be part of a larger trading diary showing you consistently log your trades/analysis.  Even better would be to include in this diary why your buy/sell is consistent with your investment plan/strategy (which ofcourse means you'll need a documented strategy).

It'd take a brave ATO person to challenge that.  Plus, you'll have the added benefit of having a trading diary to help you critically analyse your trades and performance.


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## Duckman#72

doctorj said:


> My advice to anyone that is worried that a sale may appear as a "wash sale" is to document your reasons for placing the sell order and then document your reasons for buying later.  These notes should be part of a larger trading diary showing you consistently log your trades/analysis.  Even better would be to include in this diary why your buy/sell is consistent with your investment plan/strategy (which ofcourse means you'll need a documented strategy).





I agree Doc. Good advice. However I would also add that I think it would be a great idea if your "investment plan/strategy" didn't involve selling and buying identical parcels of shares on exactly the same day!!

There are two ways to deal with the ATO. The first one: be upfront, have everything written up, correctly recorded and ready for their audit. The second one: don't give them a reason to audit in the first place.

Duckman


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