Other ATO Developments
Re-characterising capital losses as revenue losses
21.05.2009
A taxpayer alert has been released dealing with an arrangement under which taxpayers seek to re-characterise their shareholding status from that of a long term capital investor to a trader in shares. Taxpayers involved have claimed the CGT discount on previous receipts, but are now realising losses which they seek to claim as tax deductions against ordinary income (as opposed to capital losses which are only able to be offset against capital gains) (TA 2009/12).
The taxpayer alert is intended to apply to arrangements having features that are substantially equivalent to the following:
(1) The taxpayer is an individual investor who holds shares.
(2) The taxpayer has previously disposed of shares realising a profit, and treated that profit as a capital gain. This is done on the basis that the shares were held with the intention of benefiting from a long term increase in capital value and/or the receipt of dividend income during the holding period. The taxpayer’s records are maintained on this basis.
(3) As the taxpayer is an individual and had held the shares for more than 12 months, the taxpayer claimed the 50% CGT discount in their income tax return for each of the relevant financial years.
(4) The value of shares still held by the taxpayer decreases as a result of market conditions and the taxpayer has an unrealised loss in respect of those shares.
(5) The taxpayer may receive advice from a tax professional or financial advisor regarding the deductibility of losses incurred on the sale of shares for the current income year, including the benefits of being regarded as holding shares as a share trader when making such a loss.
(6) Without changing the economic substance of their shareholdings, the taxpayer decides to arbitrarily re-characterise their shareholding in order to claim the net loss from their sale as a revenue deduction pursuant to sec 8-1 ITAA 1997. This is done on the basis that the taxpayer is now carrying on a business of share trading (as opposed to carrying forward capital losses indefinitely to be offset against any future capital gains, as would be the case for an investor).
(7) To support a contention that the taxpayer is carrying on a business of share trading, the taxpayer may artificially adopt specific practices to present a pretence of being a share trader, but with no objective, material change in either the nature of investments held (or sold) or their holding activities. Some of these practices (which in the relevant circumstances a reasonable person would regard as artificial and contrived) may include:
(a) purchasing or selling shares on a more regular basis (often with small net volumes). This is often called “window dressing”;
(b) creating a trading plan for their share transaction activities with a newly stated goal of maximising profit – even though the shares sold will generate a loss, rather than a profit;
(c) increasing recording of time spent per week on the investment process (without any significant change in the total value of transactions); and
(d) maintaining additional records to evidence share transactions including additional reliance on guidance from others (without any significant change in the total value of transactions).
(8) The taxpayer subsequently decides to dispose of the shares to realise the net loss.
(9) The change in approach is applied on a prospective basis only, such that only future transactions are affected, even though there has been no substantive change in objective facts between the current year and previous years.
