TA 2009/12Re-characterising capital losses as revenue losses
FOI status: may be released
|Taxpayer Alerts are intended to be an 'early warning' of significant new and emerging higher risk tax planning issues or arrangements that the Australian Taxation Office (ATO) has under risk assessment, or where there are recurrences of arrangements that have been previously risk assessed.
Taxpayer Alerts will provide information that is in the interests of an open tax administration to taxpayers. Taxpayer Alerts are written principally for taxpayers and their advisers and they also serve to inform tax officers of new and emerging higher risk tax planning issues. Not all potential tax planning issues that the ATO has under risk assessment will be the subject of a Taxpayer Alert, and some arrangements that are the subject of a Taxpayer Alert may on further examination be found not to be of concern to the ATO. In these latter cases the Taxpayer Alert will be withdrawn and a notification published which will be referenced to that Taxpayer Alert.
Taxpayer Alerts will give the title of the issue (which may be a scheme, arrangement or particular transaction), briefly describe the issue and will highlight the features which are of concern to the ATO. These issues will generally require more detailed analysis to provide the ATO view to taxpayers.
Taxpayers who have entered into or are contemplating entering into an arrangement similar to that described in this Taxpayer Alert can seek a formal determination of the ATO's position through a private ruling (noting that the Taxation Administration Act 1953 sets out circumstances where the Commissioner may decline to issue such a ruling). Such taxpayers might also contact the tax officers named in the Taxpayer Alert and/or obtain their own advice.
This Taxpayer Alert is issued under the authority of the Commissioner.
This Taxpayer Alert describes an arrangement whereby taxpayers seek to re-characterise their shareholding status from that of a long term capital investor to a trader in shares. Taxpayers involved have claimed the capital gains tax (CGT) discount on previous receipts, but are now realising losses which they seek to claim as tax deductions against ordinary income (as opposed to capital losses which are only able to be offset against capital gains).
This taxpayer alert is intended to apply to arrangements having features that are substantially equivalent to the following:
- The taxpayer is an individual investor who holds shares.
- The taxpayer has previously disposed of shares realising a profit, and treated that profit as a capital gain.
- This is done on the basis that the shares were held with the intention of benefiting from a long term increase in capital value and/or the receipt of dividend income during the holding period. The taxpayer's records are maintained on this basis.
- As the taxpayer is an individual and had held the shares for more than 12 months, the taxpayer claimed the 50% CGT discount in their income tax return for each of the relevant financial years.
- The value of shares still held by the taxpayer decreases as a result of market conditions and the taxpayer has an unrealised loss in respect of those shares.
- The taxpayer may receive advice from a tax professional or financial advisor regarding the deductibility of losses incurred on the sale of shares for the current income year, including the benefits of being regarded as holding shares as a share trader when making such a loss.
- Without changing the economic substance of their shareholdings, the taxpayer decides to arbitrarily re-characterise their shareholding in order to claim the net loss from their sale as a revenue deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA).
- This is done on the basis that the taxpayer is now carrying on a business of share trading (as opposed to carrying forward capital losses indefinitely to be offset against any future capital gains, as would be the case for an investor).
- To support a contention that the taxpayer is carrying on a business of share trading, the taxpayer may artificially adopt specific practices to present a pretence of being a share trader, but with no objective, material change in either the nature of investments held (or sold) or their holding activities. Some of these practices (which in the relevant circumstances a reasonable person would regard as artificial and contrived) may include:
- Purchasing or selling shares on a more regular basis (often with small net volumes). This is often called "window dressing";
- Creating a trading plan for their share transaction activities with a newly stated goal of maximising profit - even though the shares sold will generate a loss, rather than a profit;
- Increasing recording of time spent per week on the investment process (without any significant change in the total value of transactions); and
- Maintaining additional records to evidence share transactions including additional reliance on guidance from others (without any significant change in the total value of transactions).
- The taxpayer subsequently decides to dispose of the shares to realise the net loss.
- The change in approach is applied on a prospective basis only, such that only future transactions are affected, even though there has been no substantive change in objective facts between the current year and previous years.
Example of an arrangement
A taxpayer with some or all of the above features enters into the following situation:
Features which concern us
Depending upon the individual facts and circumstances, the ATO considers that arrangements of this type may give rise to taxation issues including whether:
- any transactions from the taxpayer's activity are covered by the capital loss provisions under Part 3-1 of the ITAA 1997;
- any losses incurred from the disposal may be allowed as a deduction under section 8-1 of the ITAA 1997;
- any transactions from the taxpayer's activity are covered by the trading stock rules under Division 70 of the ITAA 1997;
- any losses incurred are able to be substantiated by evidence necessary to determine/support the intention of the acquisition as explained in TD 2007/2. In particular, whether records have been retained until the later of:
- the end of the statutory record of retention period, e.g. s.262A(4) of the Income Tax Assessment Act 1936 (ITAA 1936), or
- the end of the statutory period of review for an assessment for the year of income when the tax loss is fully deducted or the net capital loss is fully applied;
- the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement; and
- any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).
The ATO is currently reviewing these arrangements.
Further information on share trading can be found on www.ato.gov.au under 'Carrying on a business of share trading' and in ATO ID 2001/745.
Date of Issue: 21 May 2009
Date of Effect: 21 May 2009
ATO ID 2001/745
Aggressive tax planning
Income Tax Assessment Act 1997
Income Tax Assessment Act 1936
Tax Administration Act 1953
Schedule 1 Div 290
Sun Newspapers Ltd v FCT
(1938) 61 CLR 337
Ferguson v FCT
(1979) 37 FLR 310
79 ATC 4261
(1979) 9 ATR 873
90 ATC 621
(1990) 21 ATR 3747
FC of T v Radnor Pty Ltd
91 ATC 4689
(1991) 22 ATR 344
(1991) 102 ALR 187
Shields v DC of T (Cth)
 AATA 4
(1999) 99 ATC 2037
(1999) 41 ATR 1042
|Contact Officer:||Bruce Collins|
|Business Line:||Aggressive Tax Planning|
|Section:||Technical & Case Leadership|
|Phone:||(02) 6216 2710|