This is a phrase used in the absence of the phrases such as fuck off or piss off. It can be said to people of older generations and they cannot tell you off as they dont know what it means.
It is also used when a person cant be arsed to have an argument but knows hes right;
Person 1 - your such a gay bastard, why did u put ur head in my crotch.
Person 2 - How did i, gay bastard.
Person 3 - Yea u did i saw u.
Person 2 - Rack off!
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