ATO warns investors over wash sales

People getting their affairs in order for the end of the financial year should be cautious about disposing of shares or assets to reduce their tax.

Despite the recent signs of improvement in the global economy that have pushed local equity markets to new seven-month highs, shares remain below their levels of a year ago.

As a result, many investors are left holding unrealised capital losses, that is, shares that are trading at a lower price than when they were bought.

Some may be considering selling these shares - to crystalise any loss - before June 30 to offset capital gains from other investments.

Investors need to be aware that the Australian Tax Office (ATO) will be closely watching how the shares are disposed of, who they are sold to, and whether they are repurchased shortly after June 30.

The tax office is concerned where the sale may be manufactured, for example the shares are sold to a related party and the capital loss is claimed and then the shares are bought back at the same cost.

The process of selling shares, whether to a friend, relative or even back into the stock market, and buying them back a short time later is described as a "wash sale".

Wash sales are generally against ATO rules because there was no commercial benefit to the transaction.

What the ATO consider in this case is the transaction is carried out only to achieve a tax benefit from it.

The general anti-avoidance provisions say when you only do something to get a tax benefit, the commissioner can effectively reverse the effect of that tax benefit.

Should you require any guidance in relation to this matter please contact your C & W advisor.