Tax Avoidance : A Blurred Line

Q&A Tax

Question :

Tom has made a capital gain on selling his property this year. He also had an unrealised capital loss on another asset. However, he wished to keep that asset. He engaged a sale of that asset and then immediately repurchased it back.  It would realise that capital loss and reduce assessable income for the year.  

What do you think of his conduct? Is it more like to be tax planning or tax avoidance?  

 

Answer :

Tax laws sometimes provide different outcomes for the same economic activity conducted in different ways, which encourages the development of aggressive schemes to exploit what may be unintended legal features. This has been described as tax avoidance and is based on exploiting tax laws in a manner that is not necessarily illegal. 

The anti-avoidance provisions of Part IVA of ITAA36 will apply where it appears that a taxpayer has entered into a scheme with the sole or dominant purpose of obtaining a tax benefit. 

Penalties apply for those found to have entered into a scheme proven to fall under the antiavoidance provisions of ITAA36 (TAA, Schedule 1, ss. 284-140–284-160). 

In this case, this conduct and result was never the intention of the legislation, since the immediate repurchase means that Tom has enjoyed a reduction in assessable income while still holding that asset. There has been no economic loss to him and the sale and repurchase do not make commercial sense except for the tax benefit obtained. 

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