The Australian Taxation Office (ATO) has warned taxpayers it is currently scrutinising share sale arrangements that may result in avoiding having to pay capital gains tax (CGT).
These transactions are usually entered into with the intent of making a capital loss to avoid CGT liability. However, after the loss making transaction is completed the same asset is then reacquired.
These situations were commonly created when a person sold a CGT asset and then created a trust over the asset or transferred the asset to a trust that effectively allowed the interest in the asset to be retained by the original owner, according to the ATO's taxpayer alert.
"In certain circumstances we may determine that wash sale arrangements are schemes to reduce income tax," tax commissioner Michael D'Ascenzo said.
"I want to remind anyone who may be considering using wash sale arrangements to reduce their next tax bill that significant penalties can apply."
The ATO recommended that anyone considering a sale arrangement like this to apply for a private ruling to cover the transaction in question.
"If people come to us before we contact them for an audit, they may be entitled to reduced penalties," D'Ascenzo said.
For people who have already completed a 'wash sale', the commissioner has requested they inform the ATO immediately so a decision can be made as to whether they have contravened the law.
The main issues the ATO is concerned about in relation to these arrangements is that they may invoke general anti-avoidance provisions contained in the Income Tax Assessments Act 1936, and whether the party involved in the transaction can be seen as a promoter of a tax exploitation scheme under the Taxation Administration Act 1953.
