Income Tax application to Wash Trades
If Part IVA applies to a wash sale, the Commissioner may make a determination to cancel tax benefits obtained in connection with it. The applicaiton depends on a careful weighing of all the relevant circumstances of the arrangement and the relative weight that should be attached to each of those circumstances.
This tax ruling will be applied to the manner, substance and timing of the events, and may be questioned whether the loss making event if mainly to be explained by reference to the purpose of obtaining a tax benefit from the loss. This Ruling is therefore concerned with arrangements under which a taxpayer disposes of, or otherwise deals with, a capital gains tax asset where in substance there is no significant change in the taxpayers economic exposure to, or interest in, the asset.
Wash sales where Part IVA might be in question for the purposes of this Ruling include how the taxpayer disposes of or deals with the asset so that a CGT even happens and a capital loss or an allowable deduction is incurred (whichever is relevant).
The taxation benefit commonly obtained in connection with a wash sale is a captial loss. For this reason, this Ruling focuses on arrangements which realise a captial loss or an allowable deduction in connection with a wash sale. However, a taxpayer may obtain an allowable decution in connection with a wash sale if the asset is held on revenue account.
A SIMPLE EXAMPLE would be where a person has made a capital gain on the sale of shares. They then decide to sell some other shares at a loss to use as a tax loss offset for that financial year. They then purchase back those same loss shares in their (or their partner/company)name which is look at as a "wash sale" by the ATO. They only sold the loss shares to save some tax.
Each persons portfolios are different, and if clients feel such a "wash sale" trade may have occurred, then they should speak to their Tax Agent for tax advice.