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Edited version of your private ruling
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Ruling
Subject: Part IVA
Question:
Is your sale and re-purchase of shares considered a 'wash sale' to which Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) will apply?
Answer:
No.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
You have invested in shares using a trading account for several years.
In the 2011-12 financial year, you made a capital gain from the sale of shares.
You also made a decision to sell some parcels of shares because it looked like the value of the shares would continue to drop. You sold the following shares:
Approximately 3,000 shares in Company A
Approximately 1,500 shares in Company B
Approximately 1,500 shares in Company C
Approximately 20,000 shares in Company D
You made a capital loss on the sale of all of the shares.
The following day, after doing some research and reassessing you portfolio, you purchased the following shares:
Approximately 2,000 shares in Company A
Approximately 5,000 shares in Company E
Approximately 500 shares in Company F
You made further purchases a few days later as follows:
Approximately 1,000 shares in Company B
Approximately 7,000 shares in Company G
The shares in Company A were sold at a slightly lower price than they were re-acquired for.
The shares in Company B were sold at a slightly higher price than they were re-acquired for.
Relevant legislative provisions
Income Tax Assessment Act 1936 Part IVA
Income Tax Assessment Act 1936 Section 177A
Income Tax Assessment Act 1936 Section 177C
Income Tax Assessment Act 1936 Section 177D
Income Tax Assessment Act 1936 Section 177F
Reasons for decision
What is considered to be a wash sale?
Taxation Ruling TR 2008/1 explains the Commissioner's view on the application of Part IVA of the ITAA 1936 to 'wash sale' arrangements.
The term wash sale does not have any precise meaning. In commerce the term wash sale is used to describe the sale and purchase of the same, or substantially the same, asset within a short period of time of each other. The sale and purchase cancel each other out with the result that there is effectively no change in the economic exposure of the owner to the asset.
In your case, you sold approximately 3,000 shares in Company A and 1,500 shares in Company B in the 2011-12 financial year, generating a capital loss. You re-acquired approximately 2,000 shares in Company A the following day at a price slightly higher to the sale price. A few days later, you purchased approximately 2,000 shares in Company A at a price slightly lower to the sale price.
Your economic exposure to the assets is not the same or substantially the same. The sale and re-purchase are not of the same or substantially the same amount, changing your economic exposure to the assets by almost 40%.
Your arrangement is not considered to be a wash sale as described in TR 2008/1.
Part IVA
Part IVA of the ITAA 1936 is a general anti-avoidance provision that can apply in certain circumstances. A general provision in Part IVA gives the Commissioner the power to cancel a 'tax benefit' (or part of a 'tax benefit') that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies.
In broad terms, Part IVA will apply where the following requirements are satisfied:
· there is a scheme (see section 177A of the ITAA 1936);
· a taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit in connection with the scheme (see section 177C of the ITAA 1936); and
· the dominant purpose of a person who entered into or carried out the scheme, or any part of the scheme, was to enable the relevant taxpayer to obtain a tax benefit in connection with the scheme, or to enable the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (paragraph 177D(b) of the ITAA 1936).
The taxation benefit commonly obtained in connection with a wash sale is a capital loss.
The application of Part IVA depends on a careful weighing of all the relevant facts and surrounding circumstances of each case.
In your case, the arrangement did result in a capital loss from the sale of your shares in Company A and Company B as well as the sale of your shares in Company C and Company D.
After considering the relevant tax benefits obtained and the factors in paragraph 177D(b) of the ITAA 1936, Part IVA is not considered to apply to this arrangement.
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