Will Mickey plan to maintain his Washoe holding be effective

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Reference no: EM132704801

Question - Mickey has a keen interest in the share market. He has a diversified portfolio in a number of listed companies, but he also likes to speculate on junior mining and exploration companies. His investment activities do not constitute the carrying on of a business.

Mickey had a rather successful year in 2019/20, making the following trades:

Purchased 1,000 shares in Cloud Software Solutions Ltd for $1.72 in 2010 and sold

All 1,000 shares for $61.30 on 13 May 2020.

Purchased 40,000 shares in Lithium Mines Ltd for $0.07 on 4 August 2019 and sold

All 40,000 shares for $0.21 on 16 November 2019.

Towards the end of May 2020, Mickey reviews his share portfolio in order to identify poorly performing shares with unrealised losses that he can sell before 30 June, in order to reduce the capital gains from his other investments.

He identifies one such candidate for selling in Washoe Resources Ltd (Washoe), a small gold exploration company that has a promising gold prospect near Kalgoorlie in Western Australia. Mickey had bought 500,000 shares in Washoe for $0.12 in 2006 (junior gold explorers trade at very low share prices). However, after years of exploration, Washoe failed to find any gold, and its shares now trade at $0.02.

However, Mickey is reluctant to sell his stake in Washoe. Being something of an optimist, he is still hopeful that a major gold discovery is just around the corner.

On 5 June 2020, he meets with his accountant to discuss various end of year income tax saving strategies. After the meeting, he devises what he thinks is a clever plan to realise the capital loss in Washoe while maintaining his holding. He sells all 500,000 shares in Washoe on 16 June 2020 at the price of $0.02 and instructs his broker to buy 500,000 Washoe shares the next day, provided there are no significant movements in the price of Washoe shares. Indeed, Washoe's share price does not move, and his broker buys 500,000 shares at $0.02 on 17 June 2020.

Mickey is an Australian resident for tax purposes and has other taxable income in 2019/20 of $125,000. He is single and has private health insurance.

Will Mickey's plan to maintain his Washoe holding be effective? Explain.

Reference no: EM132704801

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