FIF Threshold question

[Snoopy]

Hi all,

Just posting a quick question in the hope someone here might know the answer.

If you have $22,000 (cost price) in FIF investment 1 at the beginning of the tax year

and $10,000 (cost price 5,000 shares at $2 per share) in FIF investment 2 at the beginning of the tax year
and then sell half the investment you has in FIF Investment 2 (5000 shares)

and you buy a further $5,000 of investment 2 (5000 shares at $1 a share) during the tax year

and then sell half the investment you has in FIF Investment 2 (5000 shares)

and then subsequent to all of this buy $22,000 (cost price) of FIF investment 3 during the tax year

All prices are NZD

Hi lawson,

The basic principles behind your question are as follows:

1/ To be liable for FIF, your total FIF liable investments at cost price must go over a $NZ50k threshold at the start of any tax year.
2/ All of your FIF investments are lumped together as a collective, and the tax bill due is based on 'deemed income' on that collective balance at the beginning of the financial year.
3/ There are 'quick sale' adjustments for investments bought and sold within the year under the FIF scheme.

Keeping these principles in mind, I will reformulate your problem in tabular form:

	End of time period 1	End of time period 2	End of time period 3	End of time period 4	End of time period 5
Investment 1 (Cost Price)	$22,000	$22,000	$22,000	$22,000	$22,000
Investment 2 (Cost Price)	$10,000	$5,000	$10,000	$5,000	$5,000
Investment 3 (Cost Price)	$0	$0	$0	$0	$22,000
Total of Investments (Cost Price)	$32,000	$27,000	$32,000	$35,000	$49,000

Position and Action Time Line Notes

a/ End of Time Period 1: Hold $22,000 of Investment 1 (cost price) and $10,000 of Investment 2 (cost price).
b/ End of Time Period 2: Sell half of Investment 2 ($5,000 cost price).
c/ End of Time period 3: Buy $5,000 worth of Investment 2 (cost price).
d/ End of Time Period 4: Sell $5,000 worth of Investment 2 (cost price)
e/ End of Time Period 5: Buy $22,000 of Investment 3 (cost price)

NOTE: I have assumed that all modelled transactions are reported, by you lawson, in chronological order. If this is not the case, my table above will have to be reconfigured

The question is as the share price for FIF investment 2 was different is your remaining holding based on an average of the share price or is a first in first out approach taken?

I need to point out that I am speaking from an investing, not a trading perspective.

As an investor you are investing for dividends or the prospect of future dividends - if the future business plan of the company you are investing in that does not pay dividends pans out. If that is your intention, it means you are not obliged to declare any capital gain you might receive as a by product of your investment decision as 'income'. Put in this light, I don't see any distinction between the packages of 'Investment 2' you bought and sold (as a means of re-balancing your portfolio of course, it was not your original intention to be in it for the capital gain- right?) at different times. Your capital transactions should all be 'tax free'.

If you were a trader (which I am not, so a trader might like to comment as to whether I have this bit right), then you may indeed be able to ring fence your trades of different blocks of shares or use 'First in First Out' rules or do whatever trading gymnastics that traders get up to. But of course as a trader you will be subject to income tax on your capital gains.

If the shares remaining are based on the average then you would exceed the threshold but if not you wouldn't or am I misunderstanding how the threshold works?

Thanks in advance to anyone who can cast some light on this. I haven't made any of these transactions yet but am thinking of doing something like this and want to understand the tax implications before I do.

If this will be the extent of your FIF investments, I don't think you have exceeded any threshold, because the FIF threshold is based on 'cost' - not market value. And at all times your cost base is less than $50k, so FIF would not apply. HTH

SNOOPY