Is this legal for tax purposes?

[need2know]

Hello,

My friend have a realised profit of ~5000 this year. This friend also have an unrealised loss of ~41000. Is it legal for him to realise a loss of ~5000 to offset the gain and buy the same stock back after June 30th?

Thank you!

 

[prawn_86]

It is illegal to sell a stock purely to avoid tax, this is commonly known as a 'wash sale' (do a search for it).

However if you were audited and can provided a reason as to why you sold that amount and bought back again then you may get away with it. However if the amount was similar to the gain it would look very suss.

Consult an accountant, as ASF members are not allowed to give financial advice.

 

[Pager]

Just my

If you sell and then buy straight back then its a no no but if you sell then buy back a few days later then its very hard to prove (or even suggest) you were doing a wash.

 

[need2know]

Woah thanks for the information

 

[beamstas]

Just say your selling it because you thought over the next week the stock would drop dramatically and then you bought it back because it didn't drop dramatically (or did)

 

[vincent191]

The ATO announcement specifically stated that "selling to a related party and buying them back the next day to gain a tax advantage" is a no no.

IMO if you sold them on the open market at arm's length and bought them back next day, it is a legitimate commercial transaction. Since when did the ATO gain the power to infringe on our constitutional rights to engage in legal enterprise?? Selling and buying shares on the open market (ASX) is perfectly legal and since when was it prohibited that you cannot sell & buy the same stock within 24 hours??

Where is the tax avoidance or tax minimisation?? All you have done is crystallise your tax lose this year. If your shares go up in value next year and you sell them you will have to pay tax on a bigger profit. It is just a timing issue.

It is every person's god given right to manage his affairs with the best possible outcome as far as the law will allow.

The ATO is fast becoming a law unto itself. It stinks.

 

[MACCA350]

The ATO announcement specifically stated that "selling to a related party and buying them back the next day to gain a tax advantage" is a no no.

That's not all they state:

(a)
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;

(b)
shortly prior to, or at the time of, disposing of, or dealing with, the asset the taxpayer acquires the same, or substantially the same, asset;

(c)
shortly prior to, at the time of, or shortly after disposing of or dealing with the asset the taxpayer enters into an arrangement to acquire the same, or substantially the same, asset at a future point in time at a price that is substantially the same as the sale proceeds received on disposal of the original asset and acquires that asset under the arrangement;

(d)
shortly prior to, at the time of, or shortly after disposing of, or dealing with, the asset the taxpayer enters into derivatives or financial instruments that substantially provide continued exposure to the risks and opportunities of the asset, as if the taxpayer had continued to hold the asset;

(e)
shortly prior to, at the time of, or shortly after disposing of, or dealing with, the asset the taxpayer enters into arrangements under which the taxpayer is entitled to, relative to the taxpayer's prior interest, the future income produced by the asset and/or any capital appreciation in the asset, or to a reimbursement for any future income produced by, or capital appreciation in the asset;

(f)
the taxpayer disposes of or deals with the asset to a company which the taxpayer is a member of, or to a trustee of a trust the taxpayer is a beneficiary or an object of, and the taxpayer controls or influences the company or trustee, or is the trustee or appointor;

(g)
the taxpayer disposes of or deals with the asset to a company which the taxpayer controls or has influence over but is not a member of, or to a trustee of a trust which the taxpayer controls or has influence over or is the trustee, or appointor of, but is not a beneficiary or an object of. The financial benefits of the asset are not distributed to the members or beneficiaries/objects but rather the company or trustee disposes of the asset to the taxpayer or enters into arrangements to provide the financial benefits of the asset to the taxpayer;

(h)
the taxpayer disposes of the asset or otherwise deals with the asset in circumstances where there is a significant overlap in the individuals who had direct or indirect interests in the asset before and after the disposal or dealing. For example, the asset is transferred from one wholly owned company to another, or between two trusts with the same trustee and class of beneficiaries or objects; or

(i)
the taxpayer disposes of the asset to family members and an arrangement or understanding exists between the parties to the effect that the asset will be re-acquired by the taxpayer, the future income produced by the asset and/or any capital appreciation in the asset will be provided to the taxpayer or applied for the benefit of the taxpayer, or there is otherwise no change in how the financial benefits produced by the asset are utilised by the taxpayer when compared to what occurred prior to the disposal.

cheers

 

[jono1887]

Its still hard to prove if you wait a few days...

 

[Krusty the Klown]

Its still hard to prove if you wait a few days...

Unfortunately tax law states that the burden of proof alway lies with the taxpayer.

The ATO only has to believe that you are trying to avoid tax and they can zap you. They don't have to prove anything.

The taxpayer has to come up with the evidence that they weren't trying to do anything illegal. Then that evidence has to be believed by a tribunal or court if the taxpayer appeals.

Most tax law sides with the ATO.

 

[Mr J]

The taxpayer has to come up with the evidence that they weren't trying to do anything illegal

Sounds like a ridiculous situation. I can't believe that the burden is on the defendant.

"Prove it was a genuine trade."

"You'll have to get a brain scan from three months ago, sir."

 

[nomore4s]

Sounds like a ridiculous situation. I can't believe that the burden is on the defendant.

"Prove it was a genuine trade."

"You'll have to get a brain scan from three months ago, sir."

What do you expect though? The tax man writes the laws.

And to be honest judging by some of the comments in this thread and other threads related to tax issues, I can understand why the laws are written like that.

 

[vincent191]

Unfortunately tax law states that the burden of proof alway lies with the taxpayer.

The ATO only has to believe that you are trying to avoid tax and they can zap you. They don't have to prove anything.

The taxpayer has to come up with the evidence that they weren't trying to do anything illegal. Then that evidence has to be believed by a tribunal or court if the taxpayer appeals.

Most tax law sides with the ATO.

Oh bloody hell, the taxpayer use to have to supply the gun, then he had to provide his own bullets and now you are telling me he has to pull the trigger as well !!!

 

[Krusty the Klown]

Oh bloody hell, the taxpayer use to have to supply the gun, then he had to provide his own bullets and now you are telling me he has to pull the trigger as well !!!

Unfortunately yes.

I think they do this to discourage people from getting too creative in tax minimisation.

It's much more efficient to close the barn doors before the horse even thinks about bolting.

 

[jono1887]

Unfortunately tax law states that the burden of proof alway lies with the taxpayer.

The ATO only has to believe that you are trying to avoid tax and they can zap you. They don't have to prove anything.

The taxpayer has to come up with the evidence that they weren't trying to do anything illegal. Then that evidence has to be believed by a tribunal or court if the taxpayer appeals.

Most tax law sides with the ATO.

It shouldn't be too hard pulling out a news article, futures levels or commoditiy prices to make up some bs reason to why you thought the price was going to fall...

Anything would do - N Korea testing weapons, new financial data comming out, suicide bombing in middle east (shoudlnt be too hard as there's one over day and say thats why you thought it was going to fall.

 

[Krusty the Klown]

It shouldn't be too hard pulling out a news article, futures levels or commoditiy prices to make up some bs reason to why you thought the price was going to fall...

Anything would do - N Korea testing weapons, new financial data comming out, suicide bombing in middle east (shoudlnt be too hard as there's one over day and say thats why you thought it was going to fall.

That might work if you are a frequent trader and had evidence of previous instances, I don't know if it would work for buy and hold investors though.

It's always determined on a case by case basis.

 

[Cartman]

That might work if you are a frequent trader and had evidence of previous instances, I don't know if it would work for buy and hold investors though.

thats correct ----- if u r registered as a trader with the ATO (bless their souls ) ----- and u have traded the instrument (stock/whatever) in question a "few times" previously --- they (that would be the tax man) DON'T have a leg to stand on ---

if u r an investor, they will try and scr#w with u ----

but if u r a trader ----- well, we have to have some benefits for all the stress don't we !!

moral of the story -- dont mix trading with investing ----- (and just for the record --- dont mix muesli with yr corn flakes --- it doesnt work !! ---- don't believe me ?? -- try it !! )

ps fruit works ok though !!

 

[MACCA350]

thats correct ----- if u r registered as a trader with the ATO (bless their souls ) ----- and u have traded the instrument (stock/whatever) in question a "few times" previously --- they (that would be the tax man) DON'T have a leg to stand on ---

IIRC if you are registered as a trader your trading profit/loss is not a CGT event so the "wash sale" will not apply since it only applies to assets that trigger a CGT event.

cheers