background image
General anti-avoidance provision applies to wash sales — Orbitax Tax News & Alerts

The Australian Taxation Office (ATO) issued, on 11 July 2007, Draft Taxation Ruling TR 2007/D7 which deals with wash sales. Draft Rulings are issued for public comment and represent the preliminary views of the ATO on the application of tax law to a specific issue.

The Draft Ruling covers arrangements involving a taxpayer incurring a loss from a disposal of assets which will be used to offset earlier gain, where the broader effect of the arrangement is that economic exposure to the asset does not cease (wash sales). An example of such arrangement could be a taxpayer selling shares at a loss at the end of one income year, using the loss to offset gains made by the taxpayer in that year and acquiring the same shares in the beginning of the following income year.

The Draft Ruling says that the ATO is likely to seek to apply the general anti-avoidance rule (GAAR) in Part IVA of the Income Tax Assessment Act 1936 to cancel the tax benefit from the losses generated by wash arrangements. One of the main requirements for an application of the GAAR is that the arrangement should be entered into with a main or dominant purpose of obtaining a tax benefit. Accordingly, wash sales made in the ordinary course of business should not attract the application of the GAAR.

The Draft Ruling notes that in order to be a wash sale, the replacement asset should not be identical to the disposed asset. It may be a similar asset or even a derivative position replicating the risks and opportunities from holding the disposed asset

UK limited liability partnerships are foreign hybrids

On 26 June 2006, the Income Tax Assessment Amendment Regulations (No. 4) were officially registered. The effect of the Regulations is that limited liability partnerships for the purposes of the Limited Liability Partnerships Act 2000 (UK) satisfy the partnership treatment requirements in Australia's foreign hybrids provisions.

Foreign hybrid provisions allow certain foreign entities, which are treated as partnerships for the purposes of foreign tax, but as companies for the Australian tax purposes, to be treated as partnerships instead. The rules aim to avoid the classification conflict where the partners are assessed for the purposes of foreign tax, but the entity for Australian tax.