FIF Threshold question

[lawson]

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 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

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?

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.

[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 1End of time period 2End of time period 3End of time period 4End 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

[lawson]

Thanks so much Snoopy.

I'm embarrassed to admit I have written this out slightly wrong sorry - although I'm not sure that it makes a difference to the fundamental question which I think you've actually answered but I just need to confirm.

I am an investor like you not a trader, I get into enough trouble trying to invest I think I'd be broke if I attempted to trade. I do not have the personality for it and I think it is always best to accept ones limitations :)

In the case study I gave (using simpler figures for illustrative purposes)

The error I've made is in relation to FIF investment 2

On day 1 of the tax year I hold FIF Investment 2 with a cost price of $10,000 (5000 shares at $2 in company A)

Then I purchase an additional $5000 (5000 shares at $1 in company A)

This means my position at the end of period 2 is $37,000

Then in Period 3 I sell half the shares in company A so 5000 shares.

So my question is really when you sell those 5000 shares how do you calculate your cost price of FIF investment going forward. Is is the average price so the remaining shares are 5000 shares at $1.50 or is it treated as the 5000 shares you sold are the first 5000 you bought so the 5000 shares remaining would have a cost price of $1 a share so $5000 as if it was the latter as you say you would be on $49,000 if you bought a further 22,000 and not over the threshold but if it was the former (the average) then you would be on $51,500 and you would be.

What I'm essentially trying to work out is how to arrange my investments to stay under the threshold but the way this year is going I'd probably owe zero in tax under FIF so probably over-thinking it.

Anyway thanks again Snoopy for your really helpful detailed reply as it helped me to work through my own thinking.

[Snoopy]

I'm embarrassed to admit I have written this out slightly wrong sorry - although I'm not sure that it makes a difference to the fundamental question which I think you've actually answered but I just need to confirm.

In the case study I gave (using simpler figures for illustrative purposes)

The error I've made is in relation to FIF investment 2

On day 1 of the tax year I hold FIF Investment 2 with a cost price of $10,000 (5000 shares at $2 in company A)

Then I purchase an additional $5000 (5000 shares at $1 in company A)

This means my position at the end of period 2 is $37,000

Then in Period 3 I sell half the shares in company A so 5000 shares.


OK I will pop the revised information you have offered into my table and see what happens



End of time period 1End of time period 2End of time period 3End of time period 4


Investment 1 (Cost Price)$22,000$22,000$22,000$22,000


Investment 2 (Cost Price)$10,000$15,000$7,500$7,500


Investment 3 (Cost Price)$0$0$0$22,000


Total of Investments (Cost Price)$32,000$37,000$29,500]$51,500



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: Buy more shares in Investment 2 ($5,000 cost price).
c/ End of Time period 3: Sell half of all shares Investment 2 ($7,500 cost price).
d/ End of Time Period 4: Buy $22,000 of Investment 3 (cost price)



So my question is really when you sell those 5000 shares how do you calculate your cost price of FIF investment going forward. Is is the average price so the remaining shares are 5000 shares at $1.50 or is it treated as the 5000 shares you sold are the first 5000 you bought so the 5000 shares remaining would have a cost price of $1 a share so $5000 as if it was the latter as you say you would be on $49,000 if you bought a further 22,000 and not over the threshold but if it was the former (the average) then you would be on $51,500 and you would be.

What I'm essentially trying to work out is how to arrange my investments to stay under the threshold but the way this year is going I'd probably owe zero in tax under FIF so probably over-thinking it.


I think you are unnecessarily confusing yourself by 'trying to calculate the cost price going forwards'. The cost price is the cost price which does not change, and it never will. Think about it like this. What do you think would happen if your tax return was flagged as 'dubious', and a tax inspector was sent around to your house to ferret around the paperwork of your 'dubious' share dealings?

Firstly, our tax inspector would ask for your purchase receipts for 'Investment 2'. There would be two contract notes. The first showing you had purchased $10,000 worth of shares at some time before the current financial year. The second showing you had purchased $5,000 dollars worth of shares during the financial year. The number of shares in total that you had purchased would be noted. The inspector would then look at your third contract note and observe that half of all the shares you had owned in 'Investment 2' were now sold. An updated statement from the share registry would confirm this, showing you had halved your holding. But which shares did you sell? (that was your question).

The registry statement would clearly show that the original shares you held had 'heritage status', and that the shares you sold must therefore have come from the 'nervous acquisition' shorter dated classified shares that you acquired later. Somehow though, I expect that our tax inspector would find no such thing, and would instead observe that all of the shares you did hold were held in the same 'bucket' prior to sale, were all mixed up, and could no longer be distinguished from each other. I expect that falsely claiming that you could identify which share was from which sub group might be seen as 'tax evasion'. The very idea that you could use subsequent purchases and sales to reduce the cost price of the original shares you bought, 'for tax purposes' might encourage shareholders to go on a buying and selling paper chase that would send our tax inspector into a spin.

No government would design a tax that is impossible to enforce. The simplest system, as far as FIF goes, would be to demand to look at your purchase contract notes and any offsetting sales contract notes, noting the offsetting dates on each. Therefore the value of your 'Investment 2' at any one time would be unambiguous and easily settled upon. That's how I see things working anyway.

SNOOPY

[pedro.nz]

Top marks to you Snoopy - always willing to help out with very detailed responses :t_up:

[lawson]

Thanks Snoopy you're a gem. Your detailed & logical answer is greatly appreciated.

[hamishmac]

Income Tax Act 2007 section EX68 Measurement of Cost (https://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1515735.html?search=sw_096be8ed81c2884d_fifo_25 _se&p=1&sr=0) says, for the purposes of the $50,000 threshold in sections CQ 5(1)(d) or (e), "If ... it is not possible to specifically identify the cost of the interest because of multiple acquisitions and dispositions or both by the person, the first-in-first-out (FIFO) method of identifying cost flows is applied."

So, if you direct your broker to sell shares from a specific lot, you would use the cost of those specifically identified shares, but if have made no such direction then use the FIFO method.

[lawson]

Thanks Hamish, I should have thought to check the 2007 ITA. I thought I had seen mention of a first in first out approach in something I had read a few months ago but when I tried to google it I couldn't seem to find anything. This is very helpful so appreciate your posting it.