This Taxpayer Alert describes an arrangement called a 'wash sale' where an asset is disposed of, but there is no substantial change in economic interest in the asset.
The type of wash sale arrangement this alert covers is where a taxpayer disposes of, or otherwise deals with a capital gains tax (CGT) asset to generate a capital or revenue loss, but where in substance, there is no significant change in the taxpayer's economic exposure in the asset. This may occur where the interest in the asset is in some way reinstated by the taxpayer, in order to apply a resulting capital loss or allowable deduction against a capital gain or assessable income already derived or expected to be derived.
Reinstatement of the taxpayer's interest is commonly achieved by a taxpayer selling a CGT asset and creating a trust over the asset or transferring an asset to a trust. We are concerned where this is done with the sole or dominant purpose of generating a capital or revenue loss to offset against a capital gain or assessable income when in substance there is an intention to acquire the same or substantially the same asset or the taxpayer still benefits from the asset.
Examples of mechanisms to carry out wash sale arrangements covered by this Taxpayer Alert and where Part IVA might be relevant are those discussed in paragraph 4 of TR 2008/1 which sets out the ATO view in relation to wash sales. These examples apply where the taxpayer disposes of, or otherwise deals with, an asset and there is an arrangement to acquire the same or substantially the same asset, or otherwise continue to benefit from the asset.
The next day (6 June 2007), Kelly instructs Bruce to buy 50,000 Echo shares. The price of the stock has now moved up to $1.21 per share. 6. Bruce charges Kelly $1,000 for transaction costs associated with the sell and buy orders.
Kelly offsets the $62,000 capital loss against the $62,000 capital gain when preparing her income tax return for the year ended 30 June 2007. 8. The scheme, for the purposes of subsection 177A(1), includes all the steps leading to, the entering into and the implementation of the planned sell and buy transactions, the incurrence of a $62,000 capital loss and the offsetting of that capital loss against the $62,000 capital gain by Kelly. The facts surrounding the entry into the scheme, including the adoption of the strategy in the financial booklet and the advice received on the expectations as to price, suggest that Kelly planned to purchase back the same number of Echo shares shortly after she sold them. Accordingly, the disposal and acquisition of the shares 24 hours later constitute a scheme within the meaning of subsection 177A(1). 9. Upon weighing up the eight factors in section 177D (ITAA 1936) (see example 2 in TR 2008/1 for the full analysis), it would be concluded that the dominant purpose of Kelly in entering into and carrying out the scheme was to obtain a tax benefit in the form of a capital loss. In particular the manner, form and substance, timing, tax effects and financial consequences for Kelly arising from the scheme support this conclusion. Accordingly, the Commissioner may make a determination under section 177F to cancel the tax benefit.