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Coming clean on wash sales
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Keith James, Partner and Frank Hinoporos, Lawyer |
The Commissioner has taken a close look at wash sales in draft taxation ruling TR 2007/D7 and confirmed his long held view: wash sales stink!
A wash sale involves the sale and subsequent repurchase of the same asset. The Commissioner has Part IVA concerns about wash sales that crystallise a capital loss on the disposal of the asset. By doing this, the taxpayer is considered to have taken two bites of the cherry: the first bite is a capital loss which can be applied against current or future capital gains and the second is the continued exposure to any potential “upside” by virtue of them remaining its legal owner.
In the draft ruling, the Commissioner sets out various ways in which a taxpayer can undertake a wash sale that would offend Part IVA. These include:
- The “plain vanilla” scenario, whereby a taxpayer disposes of or deals with the asset (say listed shares) and at the same time, or within a short period after, acquires the same or substantially the same asset;
- Transactions involving the use of financial derivatives in a way that provide continued exposure to the risks and opportunities of the asset, as if the taxpayer had continued to hold the asset;
- Arrangements that are structured so that the taxpayer disposes of the asset and realises a capital loss but remains entitled to the future income produced by the asset and/or any capital appreciation in the asset;
- Arrangements involving the use of trusts or private companies eg 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;
- Arrangements between family members, eg the taxpayer disposes of the asset to family members with an understanding that the asset will be re-acquired by the taxpayer or the taxpayer will have the benefit of the future income produced by the asset and/or any capital appreciation.
The draft ruling analyses the Part IVA issues involved in wash sales at some length. It also includes various examples of situations where a wash sale would be in breach of Part IVA (and where it would not). Most interesting perhaps are the examples relating to wash sales involving listed shares. The scenarios considered in these examples include:
- A taxpayer selling and repurchasing a security by way of a “concurrent buy and sell contract” – Part IVA.
- A taxpayer selling and repurchasing the same security within 24 hours – again, Part IVA
- A taxpayer selling and repurchasing the same security several days apart (during which time market sentiment towards the company has changes) - not Part IVA (but only in light of the particular scenario outlined).
Interestingly, out of the six examples given, there are only two where the Commissioner has not concluded Part IVA applies. Hopefully by the time the draft ruling is finalised the examples will be more balanced!
Ultimately, through this draft ruling the Commissioner is trying to deliver a very clear message: treat wash sales with extreme caution! So, if you sold some shares on 29 June to crystallise a loss and repurchased the same number of shares on 2 July, breathe deeply!
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