Capital gains tax

Originally posted by Headhunter ↑

The problem with that accountants analysis of whether Part IVA would apply to the course of action is that their conclusion that paying a nil rate of tax is still paying tax does not align with the requirements of Part IVA in the tax legislation.

Part IVA applies where a scheme is entered into for the sole or dominant purpose of obtaining a tax benefit. The term 'scheme' is very widely defined in the legislation as including any agreement, arrangement, undertaking, plan, proposal, action course of action or course of conduct. The course of action you have proposed definitely falls within the definition of a scheme.

The legislation also specifically states that a reference to a tax benefit in Part IVA includes 'an amount not being included in the assessable income of a taxpayer in a year of income'.

If the scheme results in the net capital gain on the final disposal being less than it would otherwise be then all of the requirements of Part IVA will be met.

However, Part IVA is not a 'self assessing' provision and requires that the Commissioner determine that it applies. Which in itself gives rise to the issue of the ATO even becoming aware of the scheme. Furthermore, the resources required to actually analyse data of buys and sells (the proposed course of action would look like general share trading if the taxpayers net capital gains for each year were not completely reconstructed - including parcel matching) would be significantly disproportionate to any tax clawed back.

If the course of action resulted in a capital loss (on the basis that all the interim buys and sells were disregarded) then I agree that Part IVA would not apply to the proposed course of action due to there not being a 'tax benefit'.

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Thanks for your input on this Headhunter. I've been web searching on this since I read your reply, but again failed to find any indication that the strategy would fall foul of part IVA. That is not to say that you are wrong, but the very few new posts I found on the subject do not agree.

I did find some definitive answers but they were US related. They have similar wash sale rules to us but it only applies when sold at a loss. Selling for a gain and repurchasing is allowed in the US and is in fact a recommended tax strategy for those who anticipate moving into a higher tax bracket. The US situation is best summed up by these posts.

https://finance.zacks.com/30-day-rule-buying-selling-stock-2065.html

The wash sale rule prevents you from selling shares of stock and buying the stock right back just so you can take a loss that you can write off on your taxes. The wash sale rule does not apply to gains. If you sell a stock for a profit and buy it right back, you still owe taxes on the gain.

or this...

According to the tax law, your loss transaction and the purchase of the replacement securities are a “wash,” so you shouldn't be allowed any tax benefits. ... If you sell for a gain and buy back identical stocks or securities within the above time frame, Uncle Sam is happy to collect his due with no qualms.

Even if there is ambiguity in regards to whether it would be frowned on or not, I think one way to get round the situation may be to write short term PUT options over the parcel of shares. If the options get assigned, then one buys the parcel back. The intent here would be income generation, but the same tax benefit would come with it.