What's wrong with "wash sales"?

stockGURU · 13 June 2009

ATO warns investors over 'wash sales'

The ATO has warned investors to be cautious about 'wash sales', the process of selling shares and buying them back a short time later to offset capital gains.

People getting their affairs in order for the end of the financial year should be cautious about disposing of shares or assets to reduce their tax, an expert says.

Despite the recent signs of improvement in the global economy that have pushed local equity markets to new seven-month highs, shares remain below their levels of a year ago.

As a result, many investors are left holding unrealised capital losses, that is, shares that are trading at a lower price than when they were bought.

Some may be considering selling these shares - to crystalise any loss - before June 30 to offset capital gains from other investments.

And Garry Payne, from tax training provider Kaplan Professional, says that's a legitimate tactic to lower capital gains tax.

But Mr Payne, a tax trainer with the education company, warns investors that the Australian Tax Office (ATO) will be closely watching how the shares are disposed of, who they are sold to, and whether they are repurchased shortly after June 30.

"What the tax office is concerned about it is where you've really manufactured a sale, for example you them sell to a related party and claim the loss and then you buy them back at the same cost," Mr Payne said from Perth on Friday.

"Which means you're left in the same position exactly as you were beforehand."

More: http://www.thebull.com.au/articles_detail.php?id=3872

What's wrong with crystalizing a capital loss before the end of the financial year to offset any capital gains and then repurchasing those same shares in July? Doesn't this make financial sense? I don't understand how the tax office can have a problem with this considering how many people are sitting on large capital losses after the plunge in the market over the last 12 months.

Just another blatant government money grab at the expense of ordinary Australians it would seem. No wonder so many people cheat on their taxes!

Trevor_S · 13 June 2009

stockGURU said:
What's wrong with crystalizing a capital loss before the end of the financial year to offset any capital gains and then repurchasing those same shares in July?

Because it's tax avoidance

stockGURU said:
I don't understand how the tax office can have a problem with this

Oh come on... you are doing it to avoid taxes, not for any commercial reasons

stockGURU said:
considering how many people are sitting on large capital losses after the plunge in the market over the last 12 months.

So ? carry them forward to next year... (or are you talking about unreleased losses ?)

stockGURU said:
Just another blatant government money grab at the expense of ordinary Australians it would seem. No wonder so many people cheat on their taxes!

Money grab !? That's the entire taxation system in a nutshell...

I dislike tax cheats, means the rest of us have to pay more.

insider · 13 June 2009

Trevor_S said:
Because it's tax avoidance
I dislike tax cheats, means the rest of us have to pay more.

Yes... but it is our duty as a tax payer to minimise taxes for ourselves... The government are simply trying to bandage the economy by limiting peoples choices... Not very fair... But it would depend how much money your shifting... If it's small amounts like $10,000 then the government probably wont look twice... If it's $1,000,000, then there will be some alarm bells...

This is just my opinion not endorsed advice... Consult a financial advisor and accountant...

doctorj · 13 June 2009

Don't get me started on the ATO. I heard from them this week that they want a slice of my earnings in the UK. Why do they have a right to tax me when I'm not using the goods and services the tax dollars would fund? What legal grounds do they have for it?

GRRR! At the end of the day, I'm sure there's a way around it, but it means spending money on some more professional advice

beamstas · 13 June 2009

You are not avoiding any taxes, you'll still have to pay the same amount of tax. It will all come out in the "wash".

gav · 13 June 2009

How can the ATO "prove" that you actually did it? Couldn't you just say "I believed the price of XYZ was going to fall within the next few days - but it didn't so I bought them back"...

As long as you can show why you believed the price may fall, how can they prove what you did was actually a "wash sale"?

gav · 13 June 2009

beamstas said:
You are not avoiding any taxes, you'll still have to pay the same amount of tax. It will all come out in the "wash".

If this is true then why do the ATO have a problem with it?

cutz · 13 June 2009

beamstas said:
You are not avoiding any taxes, you'll still have to pay the same amount of tax. It will all come out in the "wash".

Exactly, the cost base is just lowered.

If the ATO were serious they would get rid the rorts that property investors use, I guess that’s a political hot potato, imagine the backlash.

It’s easier to have a go at the so called villains that caused the mess were in, (derivatives traders, stock traders, sophisticated investors, short sellers, you know what I mean).

gav · 13 June 2009

cutz said:
Exactly, the cost base is just lowered.

If the ATO were serious they would get rid the routs that property investors use, I guess that’s a political hot potato, imagine the backlash.

It’s easier to have a go at the so called villains that caused the mess were in, (derivatives traders, stock traders, sophisticated investors, short sellers, you know what I mean).

Imagine the backlash if the abolished negative gearing! :

Bullock · 13 June 2009

"The ATO has warned investors to be cautious about 'wash sales', the process of selling shares and buying them back a short time later to offset capital gains."

What do the ATO consider a "short time" to be?

I was in and out of many shares during the year based on the volatility of this years market.There were announcements left, right and centre, capital raisings, take overs were on then off again.

I would have thought that this year provided many reasons for buying and selling every week.

looking at my records I see a few "Wash Sales" that I didn't even know I had performed.

beamstas · 13 June 2009

gav said:
If this is true then why do the ATO have a problem with it?

The only difference a "wash sale" makes is that you realise a capital loss this year, but because you are buying them back, when you do decide to sell them the net result will be the same. You are not avoiding any tax, it will catch up with you at some stage.

The reason why they are worried is because Kevin747 is a ******** and has gone and put the Government in a ****load of debt, they need as much tax now as they can get.

Trevor_S · 13 June 2009

gav said:
Imagine the backlash if the abolished negative gearing! :

Claiming a deduction for interest expenses should be consigned to the investment it was meant for but that's another matter.

While the points raised by others, that when you sell for the intention of selling it will all catch up with you anyway is a fair point, tax legislation is all about intent, the same thing that applies when you can legally claim a deduction.

Don't be mad at the ATO, they are simply doing the job tasked by Government, don't like it ? stop electing idiots to represent you in Parliament

KurwaJegoMac · 13 June 2009

I think it's worth taking a closer look at the statement from the ATO:

"What the tax office is concerned about it is where you've really manufactured a sale, for example you them sell to a related party and claim the loss and then you buy them back at the same cost," Mr Payne said from Perth on Friday.

"Which means you're left in the same position exactly as you were beforehand."

The tax office is looking out for people who sell their shares to a related entity/partnership in the knowledge that they can buy the shares back at the same price that they were sold. There is nothing wrong with dumping a stock and then buying it back 10 minutes later from the market - the ATO is after those people who orchestrate a sale so that a capital loss is realised whilst their position remains the same.

gav · 13 June 2009

How about this? :

Let's say I own a thriving business. I am renting and don't own a house. Through my business I buy an "investment property" that I rent cheaply to my partner. I get to live in the house, and my business gets the benefit of negative gearing and depreciation on the house.

Tax avoidance or minimisation?

I may or may not know someone who is in this situation...

son of baglimit · 13 June 2009

Bullock said:
I was in and out of many shares during the year based on the volatility of this years market.There were announcements left, right and centre, capital raisings, take overs were on then off again.

I would have thought that this year provided many reasons for buying and selling every week.

looking at my records I see a few "Wash Sales" that I didn't even know I had performed.

and as you mention, you had reasons to perform those trades - in & out of many stocks for various reasons - provide those reasons IF YOU ARE AUDITED, and all is ok.

beamstas said:
The only difference a "wash sale" makes is that you realise a capital loss this year, but because you are buying them back, when you do decide to sell them the net result will be the same. You are not avoiding any tax, it will catch up with you at some stage.

The reason why they are worried is because Kevin747 is a ******** and has gone and put the Government in a ****load of debt, they need as much tax now as they can get.

catch up with you at some stage - sorry beamstas but the govt wants their cash now, not in 12 months + time when it suits you.
and thank you for another instalment in the ongoing 'blame the current govt for all the worlds ills' - read up pal, theres plenty of good commentary coming out now supporting their efforts, and shooting down the right wing rubbish.
the next resources boom will clear your debt soon enough.

KurwaJegoMac said:
I think it's worth taking a closer look at the statement from the ATO:

"What the tax office is concerned about it is where you've really manufactured a sale, for example you them sell to a related party and claim the loss and then you buy them back at the same cost," Mr Payne said from Perth on Friday.

"Which means you're left in the same position exactly as you were beforehand."

The tax office is looking out for people who sell their shares to a related entity/partnership in the knowledge that they can buy the shares back at the same price that they were sold. There is nothing wrong with dumping a stock and then buying it back 10 minutes later from the market - the ATO is after those people who orchestrate a sale so that a capital loss is realised whilst their position remains the same.

hooray - someone sees the sense in it all.

its only been raised this year due to the fact that MANY FOLK will see such transactions as a way to avoid a large CGT bill from other profits, likely made recently - if you dont like paying tax, move to dubai.

Kez180 · 13 June 2009

The ATO is going to apply Part IVA of the ITAA 1936 to stop any scheme with the predominant purpose of achieving a tax deduction.

http://www.ato.gov.au/content/downloads/n14331-12-2005_web.pdf

A scheme is just about anything, the more systematic it is the more likely it is to be a scheme, but the definition is so broad it can encompass just about everything...

Now it does not matter if a wash sale is between related parties, on market or anything else, if the tax office feels that you have entered into an arrangement with the predominant purpose of gaining a deduction, ie the commercial reasons for doing so are outweighed by the tax benefit then they will disallow the deduction and you will have to take them to court if you feel it was justified...

The 'Wash Sale' provisions are intended to 'catch all'

beamstas · 13 June 2009

son of baglimit said:
catch up with you at some stage - sorry beamstas but the govt wants their cash now, not in 12 months + time when it suits you.
and thank you for another instalment in the ongoing 'blame the current govt for all the worlds ills' - read up pal, theres plenty of good commentary coming out now supporting their efforts, and shooting down the right wing rubbish.
the next resources boom will clear your debt soon enough.

Exactly what i was saying?

Lone Wolf · 13 June 2009

KurwaJegoMac said:
"What the tax office is concerned about it is where you've really manufactured a sale ....

"Which means you're left in the same position exactly as you were beforehand."

So if I was to realize a capital gain by selling shares, then immediately buy back those same shares so that I was left in the exact same position as I was beforehand, there would be no requirement for me to pay capital gains? I can only assume so, I mean, fair's fair right?

Krusty the Klown · 13 June 2009

gav said:
How about this? :

Let's say I own a thriving business. I am renting and don't own a house. Through my business I buy an "investment property" that I rent cheaply to my partner. I get to live in the house, and my business gets the benefit of negative gearing and depreciation on the house.

Tax avoidance or minimisation?

I may or may not know someone who is in this situation...

My bet is the ATO would see this avoidance, simply because it is not an arms length transaction. You are in a relationship with the tenant, if you did not know them they may allow it. If they did not recognise the rent you receive from your partner, they would calculate the negative gearing deductions based on market value rent. Of course this is only if you get audited.

This is not an uncommon situation.

AMSH · 13 June 2009

Just to clarify as a couple of the comments above seem to have missed the point a little. The only time that this becomes a problem is when a sale of assets has occurred in the current period and the buy-back occurs in the next - essentially the set of trades straddles two financial periods and in close proximity to the change over (ie 30 June / 1 July). You can buy and sell to your hearts content during a single financial period and there's no qualms.

As has been said above, the net effect is exactly the same with regards to CGT, by doing a wash sale you're essentially bringing forward a tax effect that would have been encountered when you sold the shares anyway.

This legislation has been around for a while, so it's not like they've just bought it in because of the downturn or taking on of large debt, although they might well be focusing on it more this year for the reasons discussed above (they do this every year; focus on a few specific areas for audits and let you know what they'll be - it was rental property deductions last year for example).

AMSH

What's wrong with "wash sales"?

stockGURU

Trevor_S

insider

doctorj

Hatchet Moderator

beamstas

gav

gav

cutz

gav

Bullock

beamstas

Trevor_S

KurwaJegoMac

gav

son of baglimit

Kez180

beamstas

Lone Wolf

Krusty the Klown

Embittered Komedy Legend

AMSH

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