Lucky was for us that market doesn't practice such things....lol
Known as "wash sale" arrangements, offsetting share losses for tax minimisation purposes could make the taxman sit up and notice.
In the current volatile sharemarket conditions, those owning shares that are “under water” – that have a value now less than when they were purchased – may be tempted to minimise their overall tax position by entering into what are known as “wash sale” arrangements.
It’s a relatively exotic term but, in its simplest form, a wash sale might occur where someone sells shares they own to crystallise a loss on those shares to then offset that loss for tax purposes against capital gains they have made elsewhere.
Once this is done, they buy back the same number of shares in the company they sold and effectively end up in the same position except that they have been able to offset their capital gains (and thereby reduce their tax).
The tax office has now released a taxpayer alert (TA 2008/7) outlining its concerns with these arrangements, including the possible application of the anti-avoidance rules of the tax law.
The type of wash sale arrangement the alert covers is where a taxpayer disposes of, or otherwise deals with, a capital gains tax asset (for example, shares) 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.
The Tax Commissioner said the tax office is not concerned with the genuine disposal of an asset at market value. He warned, however, that, in certain circumstances the tax office may determine that wash sale arrangements are schemes to reduce income tax. The Commissioner said that anyone who is uncertain about their deduction entitlements should seek independent tax advice or request a private ruling from the tax office.
The alert states that the tax office is concerned where reinstatement of the taxpayer's interest 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.
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