Investors beware: ATO warns it will crack down on EOFY practice

The Australian Taxation Office is warning investors against engaging in a common tax-time practice, saying this particular form of tax avoidance is firmly on its radar this year.

The Australian Taxation Office is warning investors against engaging in a common tax-time practice, saying this particular form of tax avoidance is firmly on its radar this year.

The practice in question is a two-step process and it’s only the second part that’s a problem.

In June, shortly before the financial year ends, many investors sell off poorly performing ASX shares and cryptocurrencies in a bid to reduce their capital gains tax liability. This is called ‘tax-loss selling’ and, yes, it’s legitimate.

Where the practice ventures into problematic territory is when those same investors, straight after the new financial year starts, re-buy the shares they dumped.

This is typically done in order to artificially increase the investor’s losses and reduce gains or expected gains, and it’s at this point that innocent tax-loss selling becomes a ‘wash sale’.

“A wash sale is different from normal buying and selling of assets because it is undertaken for the artificial purpose of generating a tax benefit for the current financial year,” the ATO noted.

“The taxpayer disposes of and reacquires the asset for the deliberate purpose of realising a capital gains loss and obtaining an unfair tax benefit.”

So what happens to investors who wash sell?

When the ATO identifies this behaviour – which it does via “sophisticated” analysis of data accessed through share registries and crypto asset exchanges – the capital loss is rejected, resulting in an even bigger loss for the investor.

“Don’t hang yourself out to dry by engaging in a wash sale,” ATO Assistant Commissioner Tim Loh said.

“We want you to count your losses, not have them removed by the ATO.”

Investors who engage in wash selling will face “swift compliance action” that may result in additional tax, interest and penalties, the ATO warned.

Tax advisers who promote wash sales or other tax avoidance activities may face action from the Tax Practitioners Board, too.

“Most tax advisers do the right thing, but a small number encourage this behaviour,” Mr Loh said.

“Promoting a tax avoidance scheme will have serious consequences for the tax adviser and could leave their client with a large tax bill.”

Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets’ position

Sources:

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