Can You Explain How Tax Works With Stocks?

[ENP]

- Do you get taxed on capital gains (is this the same as property, short term pay tax long term no tax)

- Do you pay on dividends?

- What is tax imputation?

Thanks.

[Wilkins_Micawber]

- Do you get taxed on capital gains (is this the same as property, short term pay tax long term no tax)

- Do you pay on dividends?

- What is tax imputation?

Thanks.

Capital gains are taxable if you are deemed to be a trader - not taxable if you are an investor (long term holder). I think it would be very hard to get a clear definition on this from IRD - they would most likely just make their own decision based on your share trading history should they audit you. Some short term trades would be OK if you could explain why you sold shares supposedly originally bought for the long term.

Dividends are taxed.

Tax imputation is when the company you have invested in pays tax and "imputes" your share of the tax to your dividend so the company profits are not taxed twice. Imputed tax is effectively a tax credit to the person receiving the dividend - if tax is overpaid over the year imputed tax is NOT refundable (whereas overpaid PAYE or withholding ax are) but it can be effectively carried over to the next tax year.

[ENP]

So at the end of the year you have to pa tax or does it come out of the dividends automatically when you recieve them?

For example...

How would this work?

http://www.nzx.com/markets/nzsx/TEL/dividends

[Wilkins_Micawber]

So at the end of the year you have to pa tax or does it come out of the dividends automatically when you recieve them?

Most NZ dividends come with some tax imputation attached, but you need to read the dividend notice. If it says 7cents per share fully imputed it means you get 7cps paid to you with 3 cps imputed tax credit as well (based on company tax at 30 percent, 10 cps gross profit less 30 percent tax = 7cps to you with 3 cps imputed).

Some companies will announce a dividend of 7cps partially imputed, meaning they haven't paid sufficient tax to provide full imputation. They will usually announce what the attached imputation credit will be.

Sometimes the dividend is not imputed, meaning you pay tax on the full dividend yourself.

[ENP]

So the straight dividend yield % in the newspapers don't take this into account?

[Aaron]

Just a question regarding the definition of being a "trader". My understanding is once Inland Revenue consider you a "trader" then you pay tax on all capital gains on all shares even on your long term dividend shares.

I understand to prevent trading being a problem you can set up a company to do any "trading" with long term investments held in your own name or a Trust.

Land transactions are specifically caught under the associated party rules but for shares is this a legitimate way to not let your trading activities taint your long term investments.

[macduffy]

So the straight dividend yield % in the newspapers don't take this into account?

That depends on the paper concerned.

The DomPost shows four columns

- Div cents per share
- Div yield %
- IMP Credits
- Gross Yield %

The Gross yield includes the benefit of the Imputation Credits.

[CJ]

Just a question regarding the definition of being a "trader". My understanding is once Inland Revenue consider you a "trader" then you pay tax on all capital gains on all shares even on your long term dividend shares.

I understand to prevent trading being a problem you can set up a company to do any "trading" with long term investments held in your own name or a Trust.

Land transactions are specifically caught under the associated party rules but for shares is this a legitimate way to not let your trading activities taint your long term investments.There is no tainting with shares as there is with property.

In theory, there is no need to even have a separate company as you can hold some shares for trade and some for long term. From a practical perspective, it you want to do this, it would be best to use two separate trading accounts (ie. ASB for trades and another broker for long term holds).

[CJ]

Re imputation, all dividends have to have tax totalling 33% withheld. Imputation is maximum 30% so there will be RWT or other tax credits making up the 33%. Potentially the dividend will be partly imputed so the IC : RWT ratio may be different.

The credits (IC or RWT) can be used in your tax return. Say you receive $67 dollars in dividend. This may be made up as follows:

$100 Gross dividend
$ 30 IC
$ 3 RWT

$ 67 Net dividend (amount in the bank)

The $100 goes in your tax return and the credits as well. If you are on the top personal rate, then you have extra tax to pay (5% more) but if you are on a lower tax rate, you may be due a refund.

[GTM 3442]

CJ makes a very good point.

The offsetting of Imputation Credits against Interest income is quite good for children and the retired, who tend to be on a low tax rate and who can use the IC to offset tax on Interest income.

And if you overdo it, they can carry forward excess IC's to future years.

[CJ]

note that some dividend are from PIE's (ie the index trackers and property trusts?) which withhold at your PIE rate and that is a final tax (no need to put in your tax return).

For people who have just left Uni or returned from overseas, your PIE investor rate may be alot lower than your marginal tax rate for the first couple of years giving you a added boost to dividend income. EG. return from overseas so qualify for a PIR of 12.5% but marginal tax rate is 38%. Even with the maximum PIR of 30%, there is a bit of a boost over the top marginal rate of 38%.

[ENP]

But you have to do your tax returns at the end of the year and pay IRD some money?

It doesn't just automatically come out like money from a job?

[Aaron]

There is no tainting with shares as there is with property.

In theory, there is no need to even have a separate company as you can hold some shares for trade and some for long term. From a practical perspective, it you want to do this, it would be best to use two separate trading accounts (ie. ASB for trades and another broker for long term holds).

Are you saying that all share sales are assessed on a case by case basis. For someone like me that might be true but I would have thought if you are classified as a trader then "all" share transactions are taxable.

[CJ]

Are you saying that all share sales are assessed on a case by case basis. For someone like me that might be true but I would have thought if you are classified as a trader then "all" share transactions are taxable.No. There is no tainting like there is with property. You can be a share trader but still hold a portfolio on capital account.

[shasta]

So the straight dividend yield % in the newspapers don't take this into account?

Careful about taking the details from the paper, they are historical figures & may not accurately represent what will happen in the future.

[Deev8]

So the straight dividend yield % in the newspapers don't take this into account?
Neither the newspapers, nor anyone else, can fully take tax into account because they don't know what YOUR marginal tax rate is.

Some dividends will come with imputation credits, which from 1st April this year will be a maximum of 30% of the gross dividend value. There will also be resident witholding tax deducted from the dividend paid, taking the total amount of tax "paid" up to 33% of the gross dividend value. A shareholder whose marginal tax rate is 33% will not have to pay any more tax on this dividend at the end of the tax year. A shareholder whose marginal tax rate is 38% will owe the IRD some additional tax on the dividend (a further 5% of the gross dividend value). A shareholder whose marginal tax rate is 21% or 12.5% should be able to reclaim some overpaid tax - except that imputation credits can are not refunded to the individual taxpayer, but they can be set-off against other taxable income so everything works out for someone who has paid tax on other non-dividend income during the year.

The point being that newspapers etc don't take account of tax when quoting dividend yields because they would have to quote four different figures - the effective yields for 12.5%, 21%, 33% and 38% taxpayers.

[Aotea]

Any what happens if you buy large parcels of shares and sell at a loss, is there a tax paying element in that?

[lissica]

Any what happens if you buy large parcels of shares and sell at a loss, is there a tax paying element in that?

You can claim that as a tax loss if you are a share 'trader'. But you can't if you are a share 'investor'.

[beacon]

No. There is no tainting like there is with property. You can be a share trader but still hold a portfolio on capital account.

Tend to disagree with the former sentence, agree with the latter. You'd have to have solid demarcations between actions on capital and revenue accounts including traceable annotated intentions. I suspect when push comes to shove, you'd be pushing **** uphill trying to argue with IRD otherwise in a court case. Aaron makes a good point.