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NEWS - PLANNING
Potential Risk for Investors Claiming Capital Losses on Shares
7/29/2000
In the lead-up to June 30, many investors frantically sell their shares at a loss only to quickly acquire them again for the new financial year. Investors are urged to be warned that the ATO might apply Part IVA of the Tax Act - the general anti-avoidance provisions - to stop you claiming a capital loss.
It has been a strategy adopted by a growing number of investors who seek a capital loss on their poorer performing shares to sell them prior to June 30 to record a capital loss against capital gains. Now the Accountants have the daunting task of preparing annual returns that account for all the gains and losses. The method of calculating these capital gains can make a significant difference to their tax position.
There is a warning to potential investors who seek out such strategies that they should be aware of the potential risk involved with buying back shares shortly after selling them.
There is a risk that if investors choose this strategy for no other reason than to enjoy a tax benefit, they could be heading for a conflict with the ATO. In particular, the tax office might seek to impose the Part IVA provisions of the Tax Act to stop you claiming the capital loss.
Gordon Cooper, a director of Greenwoods and Freehills, says a ruling from the tax office in 1991 (IT2643) puts people on notice that the tax office could well apply the Act to these situations.
The question to be asked is what was the dominant purpose for the sale and the buy back. If the answer is to crystallise a capital loss, then that does carry a Pert IVA risk.
Concerned investors should seek a private ruling from the tax office. Because there is no hard and fast rule, it depends on the intention and motivation of the individual concerned.
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