It is common to hear public practising accountants claim they are trapped in “Deadline City”. Some call it the “City of Form Fillers”. By these terms they mean that their time is principally spent ensuring clients satisfy the activity reporting and annual return demands made by the various laws administered by the Australian Taxation Office (ATO).
Some accountants have complained that in effect they are independent contractors for the ATO. Accountants are trained for much more than simple form filling; but the reporting obligation demands are such that they rarely have time to use this knowledge in any practical way.
From afar one can admire this model. The ATO gets to rely on a highly educated workforce, which costs it almost nothing to use. If accountants want to break free from this never-ending cycle, they will need to find ways to become more efficient.
From time to time the ATO expresses concern to its tax agent “workforce” about particular issues. Over the past 10 years the ATO has pointed out a wide range of issues concerning self-managed super funds (SMSFs) – especially compliance with the super laws.
A recent speech given by the ATO’s assistant commissioner for self-managed super funds, Stuart Forsyth, tells us that the ATO’s “reviews and audits indicate a high percentage of misreporting and calculation errors within SMSF annual returns”.
Tax agents submit 98 per cent of these annual returns and because of the high error rate, the ATO has concluded “that some agents either have a low level of basic knowledge of SMSF income tax issues or they are not taking a reasonable amount of care when preparing the annual returns”.
One area identified by the ATO for errors with self-managed super funds is capital gains tax (CGT). Another major area of concern is exempt pension income. In relation to CGT, the ATO has previously expressed concern about “wash sales”, which is a term used to describe the quick sale and purchase of the same, or very similar, asset.
Early last year the Tax Office released a Ruling (TR 2008/1) that revealed how it might treat these types of transactions under the income tax anti-avoidance penalty laws. Some common super fund transactions might be unwittingly caught by this ATO announcement.
A wash sale is an American term which first appeared in the 1850s; and in the US, buy and sell arrangements that occur during a 30-day period are not allowed. What does the Australian Tax Office mean by wash
sale? The ATO’s ruling says that it is the sale and purchase of an asset where these two transactions cancel each other out so that there is no effective change in the economic exposure of the owner to the asset.
It is interested in sell and buy transactions that occur over a “short period of time”, without defining a specific time-frame. In the ATO ruling it says it will look unfavourably at transactions or arrangements that create a tax loss and which deliver a tax benefit that would ordinarily not be available. TR 2008/1 contains eleven different arrangements that may cause problems:
– Taxpayer sells an asset and a short time later purchases the same asset or substantially the same asset;
– Just prior to selling an asset a taxpayer had acquired the same or substantially the same asset;
– A taxpayer enters into an arrangement to sell an asset and to re-purchase it at a price “substantially the same” as its sale price;
– Just before, or at the time of, the sale of an asset a taxpayer purchases financial instruments that deliver the same risks and opportunities that arise from the recently ceased direct ownership;
– When an asset is sold, a taxpayer arranges to continue to be entitled to the future income or capital appreciation produced by the recently sold asset;
– Taxpayer, who is a shareholder in a company, sells an asset to that company;
– A taxpayer who is a beneficiary of a trust, or controls the trust or is the trustee or appointor of the trust, sells an asset to that trust;
– A taxpayer, who is not a shareholder in a company but controls or is able to influence the company, sells an asset to that company and the company either sells the asset back to the taxpayer or agrees that the financial benefits of the asset should be paid to the taxpayer;
– An asset is sold from one company to another and the mtwo companies have the same shareholdings. Similarly, an asset is sold from one trust to another and the two trusts have the same trustee and beneficiaries;
– When there is significant overlap of individuals who have direct or indirect interests in an asset before and after it is sold;
– A taxpayer sells an asset to a family member and an arrangement or understanding exists between the parties that the taxpayer will purchase the asset or the taxpayer continues to fully benefit from the asset’s income and capital appreciation.
Many of these arrangements have an impact on what are common self-managed super fund strategies and transactions. For example, in-specie contributions are potentially affected because a SMSF member is by definition a beneficiary of that trust and is also a trustee.
Also, disposing of assets to make benefit payments is also potentially covered because it might be seen to represent a significant overlap of individuals. Assume a SMSF owns BHP Billiton shares and decides to sell them at a loss and purchase RIO Tinto shares.
Are these two international mining conglomerates considered to be “substantially the same”? Similarly, are two Australian share managed funds “substantially the same”. The short answer is no. Note that the ATO is saying that only those arrangements which create a loss are potentially called wash sales and hence may bsubject to the anti-avoidance rules, which would strip away all tax benefits of a transaction.
However if there are “demonstrable non-tax advantages”, then the dominant purpose of a transaction may not be the tax benefit created by the loss. Let’s consider the following example. The M&D super fund owns shares in the XYZ company, which it purchased for $95 per share.
Assume the company is now trading at $55 per share. The M&D super fund trustees still like the XYZ company and think it will one day trade higher than their fund’s original purchase price. But they decide now is a good time to reduce their future capital gain and sell their shares for $55 – thereby giving their super fund a handy capital loss – and to repurchase the shares back as soon as possible at a similar price.
Or let’s take a slightly different example. Suppose I own shares in a company listed on the ASX, which I purchased for $2 each several years ago and it has recently been placed into liquidation. Subsequent to this the liquidator publishes a report that tells shareholders they are unlikely to receive anything for their shares after all secured creditors have been paid.
Assume I make an in specie contribution of those shares to my super fund. The market value of those shares is probably worthless, which means a contribution of no value has been made. After the contribution has been made I receive a capital loss.
Unfortunately none of the examples discussed in the ATO’s ruling deal with superannuation or self-managed super funds in particular. Investors looking for certainty should consider obtaining a private binding ruling on the tax aspects of any questionable transaction before proceeding.
Tony Negline is general
manager, corporate strategy, at SUPERCentral – www.supercentral.com.au
