Tax Implications on Short Selling Shares

[darkie]

Anybody know about the tax implications of income/losses derived from short selling shares? I'm not a share trader, just a share holder. ATO aren't much help. Is income derived from a short sale profit classified as income, or a capital gain? Likewise, is a loss, which is a direct result of a short sale trade offsettable against a capital gain, or a deduction from one's income? As mentioned I am not a share trader, for tax purposes, simply a share holder.

 

[CanOz]

Profit from an asset will be considered a cap. gain. Not too many ways to short actual stock in Oz though. Usually CFD's are the best way for retail investors/traders. These attract income tax/deductions now.

Cheers,

 

[darkie]

Thanks - although I'm referring to a fairly specific instance here, and I've included some info which doesn't really clarify my initial query. Perhaps someone might elucidate if possible.

The treatment of Securities Lending arrangements are mainly covered by S26BC of the Income Tax Assessment Act 1936. In simplified terms the Act provides that:

The sale by the Lender to the Borrower at the beginning of the transaction and the reverse sale by the Borrower to the Lender at the end of the transaction are not regarded as disposals for the purposes of Capital Gains Tax.

This exemption from tax is conditional on the Lender receiving all the benefits of (otherwise) owning the securities.

The Act provides the mechanism that allows the Lender to receive the financial benefits of ownership by way of dividends, franking credits, capital returns and other corporate actions. The Lender is regarded as having received these benefits of ownership and is taxed accordingly.
Conversely, the Borrower is regarded as having not received any of the financial benefits of ownership.

The securities loan therefore has no Capital Gains Tax or Income Tax implications in respect of the securities lent and is termed tax neutral.

The transaction must be reversed within 12 months. If the transaction is not reversed within 12 months, the transaction is regarded as a disposal (sale) by the Lender to the Borrower at the date of the loan, and the exemptions from taxation are not realised.

 

[123enen]

Thanks - although I'm referring to a fairly specific instance here, and I've included some info which doesn't really clarify my initial query. Perhaps someone might elucidate if possible.

The treatment of Securities Lending arrangements are mainly covered by S26BC of the Income Tax Assessment Act 1936. In simplified terms the Act provides that:

The sale by the Lender to the Borrower at the beginning of the transaction and the reverse sale by the Borrower to the Lender at the end of the transaction are not regarded as disposals for the purposes of Capital Gains Tax.

This exemption from tax is conditional on the Lender receiving all the benefits of (otherwise) owning the securities.

The Act provides the mechanism that allows the Lender to receive the financial benefits of ownership by way of dividends, franking credits, capital returns and other corporate actions. The Lender is regarded as having received these benefits of ownership and is taxed accordingly.
Conversely, the Borrower is regarded as having not received any of the financial benefits of ownership.

The securities loan therefore has no Capital Gains Tax or Income Tax implications in respect of the securities lent and is termed tax neutral.

The transaction must be reversed within 12 months. If the transaction is not reversed within 12 months, the transaction is regarded as a disposal (sale) by the Lender to the Borrower at the date of the loan, and the exemptions from taxation are not realised.

I am reasonably confidant that the above statement refers to the original owner of the shares, not the short seller/borrower.

The original owner will be deemed to still own the shares while they are borrowed by the short seller.
The original owner will still recieve financial benefits of ownership by way of dividends, franking credits, ( the borrower will need to pay this back to the original owner) capital returns and other corporate actions and will pay tax accordingly.
This is provided the shares are returned (short sell is closed) within 12 months.
The original owner will eventually have a CGT event to deal with one way or the other.


As for your particular situation as the borrower/short seller, I suspect that CanOz is correct.