Some questions for traders

[Lawso]

I don't mean to pry. You can ignore this if you wish or tell me to MMOB. But I'm curious about how you guys operate and how well it works out for you.

To begin with, I notice you never mention the dread T word - TAX. You are obviously trading to make money and incurring tax liability. Does this mean you have to report all trades to the IRD to back up your tax return? Do you ever deliberately sell at a loss to reduce tax liability? With online trading I guess brokerage is not a significant factor - right? What's an average frequency of trades - one a day, one a week, or what? Are you paying 39% i t and are you factoring this into the results of your year's trading? Do you ever compare that outcome with that of an investor who might make, say, 6 to 10 sales a year, enjoying a tax-free capital gain, while also getting income from dividends, often fully imputed.

What deductions can the average trader claim - for computer equipment, use of home/office premises, magazine & newspaper subscriptions etc? Are you registered for GST and able to claim back a percentage of phone/car etc expenses?

I enjoy reading many of your posts on ST but I guess there are other non-traders, as well as me, who would like to know a bit more about how you operate.

[blackcap]

quote:Originally posted by Lawso

Do you ever deliberately sell at a loss to reduce tax liability?

There is nothing wrong with this and happens all the time. Just means that you will retain "winners" in your portfolio and just defers the tax liability to later years.

I trade and yes, do declare tax on trading.

[Snow Leopard]

Q. Does this mean you have to report all trades to the IRD to back up your tax return?
A. No. You just report your profit/loss on your and fill in your ?IR10? You also keep records of trades, bank accounts, receipts for expenses in case the IRD ever decide to check up.

Q. Do you ever deliberately sell at a loss to reduce tax liability?
A. NO - I would rather earn more and pay more tax.

Q. With online trading I guess brokerage is not a significant factor - right?
A. Brokerage fees are a business expense and thus claimed in full. Brokerage can be a significant expense on a trade. e.g. I bought and sold NPX yesterday the brokerage fees swallowed more than half the capital gain on the actual shares.

Q. What's an average frequency of trades - one a day, one a week, or what?
A. For me it purely depends a) perceived opportunity to make money on a situation b) having the cash sitting in the account c) having the time to monitor the price i.e. not doing my other job. In the last 12 months I have bought/sold about 40 times.

Q. Are you paying 39% it and are you factoring this into the results of your year's trading?
A. You pay tax at the appropiate rate and yes

Q. Do you ever compare that outcome with that of an investor who might make, say, 6 to 10 sales a year, enjoying a tax-free capital gain, while also getting income from dividends, often fully imputed.
A. Someone doing 6 buy/sells a year may well be a trader in the eyes of the IRD. The definition is all about INTENT.
I trade as much for the fun/excitment as anything to be honest and have a company for said purposes. As a seperate taxable entity I also invest which so far as been a buy and hold operation and in absolute terms I have acheived greater gains from that.

Q. What deductions can the average trader claim - for computer equipment, use of home/office premises, magazine & newspaper subscriptions etc?
A. yes to all

Q. Are you registered for GST and able to claim back a percentage of phone/car etc expenses?
A. GST registered and I do not claim car expenses for internet trading.

Does that answer you sufficiently?

[Risk]

nice answer by Paper Tiger.
I have added the few bits in blue.


quote:Originally posted by Paper Tiger

Q. Does this mean you have to report all trades to the IRD to back up your tax return?
A. No. You just report your profit/loss on your and fill in your ?IR10? You also keep records of trades, bank accounts, receipts for expenses in case the IRD ever decide to check up.
you attach a summary of profit/loss for all COMPLETED trades. Trades still in progress are not included (optional?)

Q. Do you ever deliberately sell at a loss to reduce tax liability?
A. NO - I would rather earn more and pay more tax.
you can sell any losers just before 31st march, to offset any profits during the year...thats why there is often a sell off the last week in march

Q. With online trading I guess brokerage is not a significant factor - right?
A. Brokerage fees are a business expense and thus claimed in full. Brokerage can be a significant expense on a trade. e.g. I bought and sold NPX yesterday the brokerage fees swallowed more than half the capital gain on the actual shares.

Q. What's an average frequency of trades - one a day, one a week, or what?
A. For me it purely depends a) perceived opportunity to make money on a situation b) having the cash sitting in the account c) having the time to monitor the price i.e. not doing my other job. In the last 12 months I have bought/sold about 40 times.

Q. Are you paying 39% it and are you factoring this into the results of your year's trading?
A. You pay tax at the appropiate rate and yes

Q. Do you ever compare that outcome with that of an investor who might make, say, 6 to 10 sales a year, enjoying a tax-free capital gain, while also getting income from dividends, often fully imputed.
A. Someone doing 6 buy/sells a year may well be a trader in the eyes of the IRD. The definition is all about INTENT.
I trade as much for the fun/excitment as anything to be honest and have a company for said purposes. As a seperate taxable entity I also invest which so far as been a buy and hold operation and in absolute terms I have acheived greater gains from that.
as a trader, you also get the dividends and imp credits if you are holding the share at the time. you dont pay extra tax on these, since tax has already been paid by the company.

Q. What deductions can the average trader claim - for computer equipment, use of home/office premises, magazine & newspaper subscriptions etc?
A. yes to all. you can claim all expenses you are entitled to for any home based business.

Q. Are you registered for GST and able to claim back a percentage of phone/car etc expenses?
A. GST registered and I do not claim car expenses for internet trading. you CAN claim if you use your phone and car for share trading, eg phoning brokers, travel to shareholder meetings, postage etc

Does that answer you sufficiently?

[Steve]

quote:Originally posted by Paper Tiger

Q. Are you paying 39% it and are you factoring this into the results of your year's trading?
A. You pay tax at the appropiate rate and yes

Q. Are you registered for GST and able to claim back a percentage of phone/car etc expenses?
A. GST registered and I do not claim car expenses for internet trading.

My thoughts of interest:

1) It makes little financial sense to be paying 39% on trading profits. If you have a high-paying day job, or are making significant sums trading, then it would be appropriate to have a seperate structure and pay tax at 33%.

2) Share trading is classified as an exempt financial activity by the IRD, so I am unsure why you would be GST registered solely for share trading as you are unable to claim the GST input credits where you solely have exempt supplies.

PT, your reasoning on point 2, given that you are GST registered?

[duncan macgregor]

STEVE, I dont trade this way so my answer might be complete rubbish. I cant see if you are running a business solely for share trading you could register GST as such. If the share trading was part and parcel of another business then i would think Gst might be claimed back on brokers fees phone bills etc etc. Share trading is not buying or selling goods or services but may become part of another business.

[rmbbrave]

I have an even more basic question.

What is the legal/IRD definition of a trader as opposed to an investor?

[Steve]

quote:Originally posted by rmbbrave

I have an even more basic question.

What is the legal/IRD definition of a trader as opposed to an investor?



Your "INTENTION"...

[duncan macgregor]

RMBBRAVE, grey areas .How many houses can you buy and sell?. How many cars can you buy and sell?. How often can you buy and sell shares?.Dont push your luck and you are okay.Macdunk

[rmbbrave]

[/quote]
Your "INTENTION"...
[/quote]

Your intention to do what?

[dirty]

is it best to set up a separate company to trade with so you pay at the lesser rate and can claim expenses and dont you have to register for gst if you gross over forty five thousand

[Lawso]

Great responses. Many thanks, Tiger, Risk and others.
I note that Tiger talks about his other job, which is probably the case with most traders. Is anyone I wonder doing it fulltime and making a decent living?

rmbbrave: I don't think there is a "legal" definition and as far as the IRD is concerned it seems to be a grey area. As Tiger points out, it's a question of the person's intent. If the emphasis seems to be on making a profit to spend on cars/overseas trips etc or to supplement ordinary income they might say your gains/losses are taxable. But if you can convince them that, e.g. your main aim is to accumulate capital for retirement, grandchildren's education etc they'll regard a small number of trades (6-10 a year? - it's never been spelt out) as reasonable and non-taxable.
Whenever I sell I make a note of my reasoning at the time - "not performing", "switching to get better income", "selling to protect capital" or whatever. I've never yet been questioned but if it ever happened I believe I could satisfy them that I'm not trading purely for profit.

[kura]

To Blackcap, I dissagree with you, re your strategy to sell your "losers" prior to 31/03 each year (to realise a loss for tax purposes) I declare my trading profits for tax, and at end of the financial year, my remaining portfolio is valued at the lower of cost or Net Realisable Value (NRV) as this is the entitlement of any taxpayer (whatever they trade in) This rule applies on a line by line basis, so that your winners can be valued at cost, and loosers can be valued at market. The net effect is to gain the tax loss benefit, without having to actually realise the loss. (Moral of story, sell shares cos you dont like them no more, not for tax reasons)

PS: Used to be an accountant in another life !

[Steve]

Kura, the IRD closed the hole allowing share traders to claim NRV on shares that are below cost back in 1999 from memory.

The rule of lower of cost/NRV still stands for all "trading stock" except shares.

Prior to the change, I often used to buy into shares going ex div in mid/late March, receive the dividend as well as claiming the "capital" loss.

[blackcap]

quote:Originally posted by kura

To Blackcap, I dissagree with you, re your strategy to sell your "losers" prior to 31/03 each year (to realise a loss for tax purposes) I declare my trading profits for tax, and at end of the financial year, my remaining portfolio is valued at the lower of cost or Net Realisable Value (NRV) as this is the entitlement of any taxpayer (whatever they trade in) This rule applies on a line by line basis, so that your winners can be valued at cost, and loosers can be valued at market. The net effect is to gain the tax loss benefit, without having to actually realise the loss. (Moral of story, sell shares cos you dont like them no more, not for tax reasons)

PS: Used to be an accountant in another life !





Kura

You may be able to for financial reporting purposes, but the IRD dont allow it. This lead to a timing difference which leads to a deferred tax liablity.

BTW - it may not be my strategy, just pointing out that plenty use it as their strategy. Know of some that do sell losses and then buy back immediately. Whether this works long term is anyones guess.

[thereslifeafter87]

There is a legal definition. The question is whether you bought the shares with the intent of selling them. In reality, the courts have interpreted this to mean if you buy the shares with a dominant purpose of capital gain, and when you bought you knew you would be selling within a few years then you are a trader.
If you have an excuse - change of circumstance that caused you to sell the shares, then you will not be liable for tax. EG: my car blew up and i needed a new one, so I sold some shares.

The IRD obviously can't track traders using this definition, so apparently they use a rule of thumb - turn over more than 25% of your portfolio in a year, and you are a trader.


quote:Originally posted by Lawso

Great responses. Many thanks, Tiger, Risk and others.
I note that Tiger talks about his other job, which is probably the case with most traders. Is anyone I wonder doing it fulltime and making a decent living?

rmbbrave: I don't think there is a "legal" definition and as far as the IRD is concerned it seems to be a grey area. As Tiger points out, it's a question of the person's intent. If the emphasis seems to be on making a profit to spend on cars/overseas trips etc or to supplement ordinary income they might say your gains/losses are taxable. But if you can convince them that, e.g. your main aim is to accumulate capital for retirement, grandchildren's education etc they'll regard a small number of trades (6-10 a year? - it's never been spelt out) as reasonable and non-taxable.
Whenever I sell I make a note of my reasoning at the time - "not performing", "switching to get better income", "selling to protect capital" or whatever. I've never yet been questioned but if it ever happened I believe I could satisfy them that I'm not trading purely for profit.

[rmbbrave]

TLA87,

Thanks very much.

Now that's a legal definition I can work with.

[Snow Leopard]

quote:
posted by Steve

2) Share trading is classified as an exempt financial activity by the IRD, so I am unsure why you would be GST registered solely for share trading as you are unable to claim the GST input credits where you solely have exempt supplies.

PT, your reasoning on point 2, given that you are GST registered?


Although the company does not charge GST, it does claim back GST on supplies, i.e. computers etc.

[Snow Leopard]

quote:
posted by tla87

The IRD obviously can't track traders using this definition, so apparently they use a rule of thumb - turn over more than 25% of your portfolio in a year, and you are a trader.



I have never heard this definition before, and rmbbrave or anybody I would NOT call this a legal definition. It would only be a good working definition that you could rely on after it has been tested in a court of law. I certainly would not want to be the one to test it.

This whole tax paying thing is frankly a pain in the nether regions. I split my trading from my investing activities into seperate tax entities because the IRD were accepting of this. I have seen it suggested using seperate bank accounts etc I could not get a clear enough answer on this to risk it.
Until there is a definitive definition unambigious in detail then this will continue to be a problem.

I guess the IRD are happy to have us quaking in our boots over this. [}:)]

[Snapper]

quote:
--------------------------------------------------------------------------------

posted by Steve

2) Share trading is classified as an exempt financial activity by the IRD, so I am unsure why you would be GST registered solely for share trading as you are unable to claim the GST input credits where you solely have exempt supplies.

PT, your reasoning on point 2, given that you are GST registered?



--------------------------------------------------------------------------------


Although the company does not charge GST, it does claim back GST on supplies, i.e. computers etc.
__________________________________________________

You can only claim back GST if you charge GST on sales. For instance, my business does many exempt sales so GST is usually about 1% of sales (normally 1/9th). That means I can only claim 1% GST on expenses. Don't bother arguing the toss over this one - I've had a lot of letters back and forth from the lawyers at the IRD over this. If you're claiming GST on sharetrading expenses they're gonna come get ya.

[Snow Leopard]

Snapper interested that you differ from me on this.

I fill in GST returns where GST charged is zero and claimed is greater than zero and have done for quite for about six years. It was the IRD who pointed out that I could reclaim the GST back on expenses when I suggested it was not worth registering.

[Steve]

PT, if I may quote from the CCH 2004 Master Tax Guide, pg 1241-1244 (section 32-040 thru 32-044).

"Exempt Supplies:

Common transactions that come under one or more of the activities listed above include the buying and selling of company shares...

Because...are treated as exempt...cannot claim GST input tax on the goods and services which they buy."

It would appear that the IRD have sold you a lemon?!

[Snow Leopard]

quote:Originally posted by Steve

PT, if I may quote from the CCH 2004 Master Tax Guide, pg 1241-1244 (section 32-040 thru 32-044).

"Exempt Supplies:

Common transactions that come under one or more of the activities listed above include the buying and selling of company shares...

Because...are treated as exempt...cannot claim GST input tax on the goods and services which they buy."

It would appear that the IRD have sold you a lemon?!



Oh Fun! I will have to chase this up when I get back to New Zealand

[Steve]

quote:Originally posted by Paper Tiger

It was the IRD who pointed out that I could reclaim the GST back on expenses when I suggested it was not worth registering.


Probably worth noting here that the majority of the IRD staff on the General Public 0800 numbers don't actually have much formal training in accounting/taxation.

It is more a case of following the flow-charts to deal with the more basic queries...

[blackcap]

quote:Originally posted by Steve


quote:Originally posted by Paper Tiger

It was the IRD who pointed out that I could reclaim the GST back on expenses when I suggested it was not worth registering.


Probably worth noting here that the majority of the IRD staff on the General Public 0800 numbers don't actually have much formal training in accounting/taxation.

It is more a case of following the flow-charts to deal with the more basic queries...





I call them reasonably often too and its interesting the conflicting information that can be provided by call centre staff. My position is that they are there to help, but you cannot rely on their judgements. Just wrong more often than not with more complex issues.

POSTERS Call the taxation Help line and you need the answers in writing At least record the conversation.

[OldRider]

My understanding is that GST cannot be charged, or claimed without a tax invoice being generated.
The interesting point for me is that a brokers contract note is not a tax invoice, can I deduce from this there is no GST on brokerage?.

Not being a trader and not looking for tax deductions on trading expenses I hadn't taken much notice of any of this before. Did know that brokerage was not a taxable deduction for "investors", but was for "traders"

OLD RIDER most financial transactions are zero rated for gst purposes or exempt.

[kura]

Correct !

[thereslifeafter87]

PT,

Thats not a legal definition, it is a rule of thumb the IRD uses when examining share-dealing activities.

They figure that if someone turns over that much of their portfolio, the court will probably find they are a trader.

The court looks at intent as inferred by the evidence.

You can't really have an unambiguous definition. Its about distinguishing between gains of a capital nature and gains of a revenue nature.

Gains on capital goods (what you use to produce revenue goods/income eg: a factory) are not taxable, whereas gains on revenue goods (what you sell to produce income eg: steel bars) are taxable.
The grey area is when your business comprises trading in goods of a capital nature to the extent that they effectively become goods of a revenue nature (ie: if it is your business to buy factories and sell them at a profit).

This is the problem with the tax system at the moment. We should either just have a capital gains tax that equates to the comparable level of income tax, or redo the whole tax system allowing deductions for all items purchased, and booking revenue for all items sold.

In that way, every time you bought a share it would be an expense, and every time you sold it would be revenue. The only problem with this approach is timing differences - the government has to wait longer to get its money... and you get your deduction sooner.







quote:Originally posted by Paper Tiger


quote:
posted by tla87

The IRD obviously can't track traders using this definition, so apparently they use a rule of thumb - turn over more than 25% of your portfolio in a year, and you are a trader.



I have never heard this definition before, and rmbbrave or anybody I would NOT call this a legal definition. It would only be a good working definition that you could rely on after it has been tested in a court of law. I certainly would not want to be the one to test it.

This whole tax paying thing is frankly a pain in the nether regions. I split my trading from my investing activities into seperate tax entities because the IRD were accepting of this. I have seen it suggested using seperate bank accounts etc I could not get a clear enough answer on this to risk it.
Until there is a definitive definition unambigious in detail then this will continue to be a problem.

I guess the IRD are happy to have us quaking in our boots over this. [}:)]

[thereslifeafter87]

I would help on the GST questions, but I didn't study that part of my tax paper for the exam....

We had to answer 4 of 6 questions and 2 were on GST... So I went for the other four..

[kura]

To Blackcap & Steve
Reviewed the rules on valuing shares at lower of cost/NRV (Tax Info Buletin, from IRD website) (TIB Vol 10 Number 12) and you are correct, the rules changed back in 1999, so I will have to realise a loss to be deductable. Funny thing is, that I got audited a few years ago, and inspectors never queried this aspect of return.
Cheers

[blackcap]

quote:Originally posted by kura

To Blackcap & Steve
Reviewed the rules on valuing shares at lower of cost/NRV (Tax Info Buletin, from IRD website) (TIB Vol 10 Number 12) and you are correct, the rules changed back in 1999, so I will have to realise a loss to be deductable. Funny thing is, that I got audited a few years ago, and inspectors never queried this aspect of return.
Cheers



No worries Kura, When it comes to (accounting vs IRD) half the time I get the feeling that neither party really knows what the rules are in some instances. So either the auditors just didnt know, were incompetant in their audit, or just didnt care.

Regards

[marcus_milo]

quote:Originally posted by OldRider

My understanding is that GST cannot be charged, or claimed without a tax invoice being generated.
The interesting point for me is that a brokers contract note is not a tax invoice, can I deduce from this there is no GST on brokerage?.

Not being a trader and not looking for tax deductions on trading expenses I hadn't taken much notice of any of this before. Did know that brokerage was not a taxable deduction for "investors", but was for "traders"


Just had to add my five cents to this one. In fact you can claim brokerage and other expenses related to investment activities. If you read the IR3 there is a section, "Other Expenses". To paraphrase, any expense that is related to an activity that produces taxable income can be claimed. Therefore, if you buy a parcel of shares in order to recieve the dividend, which is in fact taxable *even* if it includes imputation credits (I checked this with IRD), then you can claim the brokerage. You can also include the cost of interest on borrowing money to buy such shares. Before I left New Zealand I was going to borrow money using my house to buy bonds (3% profit on the split). However, as non-tax resident, you can not claim expenses related to interest and dividend income...I guess I have to be happy with the 10% and 15% withholding tax instead ;)

I even used to (years ago) claim the cost of newspapers (also checked with IRD and have a piece of paper to say it is ok!). Investment is a taxable activity, as you pay tax on dividends and interest.

Of course if you have a concern, you can always write to IRD with what you want to claim, and ask for a ruling. This costs nothing (only time and a stamp), and you are legally protected.

Now I have a question. Considering the description of trading is buying to sell for captial gain (well actually as others have stated, the IRD definition is very clear, if you buy with the INTENTION to sell for a profit, then you are lible to pay tax on the profit), and not dividends, regardless of the timeframe (1, 2 or more years), then if you buy a company that deliberatly states that it will not pay dividend, e.g. TTP, does that not automatically make you a trader if you buy these shares since your only hope to make profit is to sell them for capital gain?

[Keitaro]

I believe GST is charged on supply of goods and services.
Shares (aka chose in actions) are not goods therefore there
are not subject to GST. You can only claim GST on expenses
if those expenses are in furtherance of a taxable activity.
If your only activity is supplying shares then you are not
supplying any goods or services so there is no taxable
activity. Therefore you cannot claim any GST on expenses
you paid.

In terms of brokerage, brokerage = financial services so
there's no GST on it in any event. Accounting wise,
brokerage should be accounted as part of the cost of the
shares purchased or reduction in proceeds from sale rather
than as a seperate expense.

[marcus_milo]

TLA87

For heavens sake don't put ideas in the heads of IRD! I like the grey captial gains tax exactly the way it is. :). I would hate to pay 39% tax on the incidental captial gains I make from my investing activities.

[Steve]

mm, if you would have to pay 39% on your capital gains, then you have structured your financial affairs inefficiently...

[thereslifeafter87]

Capital gains tax would cure a lot of inefficient asset allocation in NZ. We seem to put all our capital into housing rather than business - I would say thats because people who choose to buy houses get a 33%-39% head start.

Most financial services are GST exempt (or zero rated - cant remember which), you dont pay GST on them, so cannot claim any input credits

Marcus,

You cannot deduct all interest or all brokerage expenses unless you are a trader. Expenses are deductible only to the extent they are incurred in deriving gross income. If you borrow $100,000 to buy shares, part of the interest you pay on the $100,000 was incurred by you for the purpose of receiving a capital gain from the shares, and partly for receiving dividends on the shares.

The interest will be deductible only to the extent it was incurred in deriving taxable income - ie: dividends. So maybe 20-30% deductible? - it depends on your intent, your actual returns, etc. Again its a very grey area...
The same would go for brokerage expenses.

[blackcap]

quote:[i]

Marcus,

You cannot deduct all interest or all brokerage expenses unless you are a trader. Expenses are deductible only to the extent they are incurred in deriving gross income. If you borrow $100,000 to buy shares, part of the interest you pay on the $100,000 was incurred by you for the purpose of receiving a capital gain from the shares, and partly for receiving dividends on the shares.

The interest will be deductible only to the extent it was incurred in deriving taxable income - ie: dividends. So maybe 20-30% deductible? - it depends on your intent, your actual returns, etc. Again its a very grey area...
The same would go for brokerage expenses.



Weve had this one before. You can deduct interest incurred in buying a passive portfolio. The portfolio provides dividends and interest which is taxabele. Even if you are not a trader you may deduct the interest. IRD ruling.

[tintin]

Keitaro,
I am all for a simple approach and I follow the practise that you set out
" Accounting wise,brokerage should be accounted as part of the cost of the
shares purchased or reduction in proceeds from sale rather
than as a seperate expense."
I once was interviewed by the IRD as to how I went about deciding which
transactions were "trades" and which were "investments".
I kept talking about "intent at the time I bought".
IRD then switched to asking where I got my tax advice. And that was that.
It was a fairly inconclusive interview .
Since then I have started declaring all my sales of shares as generating taxable
income or losses.
Some IRD staff have suggested to me that I stop treating myself as a trader, which
I regard as strange advice and certainly goes away from the test of intent at time of purchase.

[thereslifeafter87]

Blackcap,

It might be an IRD ruling, but its not the law.

Also, if you start deducting interest, you are likely to invite an audit.

You would want to be very very sure that your portfolio was entirely passive to follow this course of action.

If it shows up that you have traded a bit... you could end up with a tax bill (provided you actually made a profit).

[barney]

If like me you regard yourself as an investor and not a trader I have found it a usefull idea to keep a diary aside from all the normal tax documentation etc.When buying I keep a record of the reason for buying with special attention on the intent of the investment.When I sell I state the reason for selling ie change in dividend policy or a negitive result etc.If the IRD ever ask at least you can show them some track record.Selling and making a capital gain is not automatically taxable if your intent was to invest but you sold due to a change in circumstances.This includes a change in the companies fortunes good or bad.

As an aside how do the IRD find out about capital gains made on the sales of shares unless you or somebody else tells them about it?Do they moniter share regestries and changes in shareholdings?

[Steve]

quote:Originally posted by barney

As an aside how do the IRD find out about capital gains made on the sales of shares unless you or somebody else tells them about it?Do they moniter share regestries and changes in shareholdings?


They do have the authority to monitor, but in practice probably don't.

When they had a crack-down on Central Otago property speculators earlier in the year, they had access to the records of Land Information (property register), real-estate agents, valuers, banks etc. NB:they discovered $$$millions in undeclared capital gains...

[OldRider]

The advice from Barney for investors to document
all transactions with reasons is sound.

The major part of my transactions are switching from one stock to another,very often the total amount of a sale goes into the purchase, I no longer have other income to increase the portfolio.

So I document as well how much projected annual dividend income is lost through any switch, and how much is acquired. When a transaction can be shown in this way to be dividend income positive, sometimes only in expectation and when year on year dividend income does increase,IRD so far has not attempted to be argumentative.

Doing things this way has maintained my status as an investor, and this is for what I regard as substantial family trust holding.

Looking back the maximum percentage of the portfolio sold in any year has never exceeded 21% of value, and the five yearly average is a rather lower than this.

[kura]

Re Trading/Investing distinction with IRD (I have both trading and investing portfolios ) When asked by IRD (audited a few years ago) I made the comment that I have a fixed % of capital allocated to trading, and a % allocated to investing (This seemed to keep them happy )
Allthough my circumstances are quite clear cut
- Trading Turnover (not profit unfortunatly) approx 500% of trading portfolio.
- Investment Turnover approx 20% investment of portfolio.

[warthog]

quote:Originally posted by barney

how do the IRD find out about capital gains made on the sales of shares unless you or somebody else tells them about it?Do they moniter share regestries and changes in shareholdings?


If they follow the correct procedure, they are entitled to any information about you from any source in connection with your finances. In NZ they can use legal leverage to achieve this where necessary, but elsewhere it depends on information-sharing agreements with overseas authorities.

[marcus_milo]

quote:Originally posted by thereslifeafter87

Blackcap,

It might be an IRD ruling, but its not the law.

Also, if you start deducting interest, you are likely to invite an audit.

You would want to be very very sure that your portfolio was entirely passive to follow this course of action.

If it shows up that you have traded a bit... you could end up with a tax bill (provided you actually made a profit).




Let me quote from IR 3G "Individual Income Tax Return Guide 2003"...

Page 44, Section "Question 25 Expenses"...

"interest on money you borrowed to buy shares or to invest-as long as the investment will produce some income that is taxable"

As i see it, it is not a dispute whether you claim the interest on investment loan, but rather whether you should pay tax on capital gain.

[marcus_milo]

quote:Originally posted by Steve

mm, if you would have to pay 39% on your capital gains, then you have structured your financial affairs inefficiently...




ok agreed, 33% then, unless you have a secret recipe for avoiding paying tax at that rate! ;)

[blackcap]

Fair enoug Marcul Milo

but surely you pay tax on dividends do you not?

Thus investing in a share portfolio is providing you with taxable income. Even without the capital gain.

Just like if you borrowed $100,000 at 8% to invest in $100,000 worth of bonds at 10%. You pay tax on the 10% but may deduct the interst paid on the money borrowed.

[thereslifeafter87]

quote:Originally posted by marcus_milo


quote:Originally posted by thereslifeafter87

Blackcap,

It might be an IRD ruling, but its not the law.

Also, if you start deducting interest, you are likely to invite an audit.

You would want to be very very sure that your portfolio was entirely passive to follow this course of action.

If it shows up that you have traded a bit... you could end up with a tax bill (provided you actually made a profit).




Let me quote from IR 3G "Individual Income Tax Return Guide 2003"...

Page 44, Section "Question 25 Expenses"...

"interest on money you borrowed to buy shares or to invest-as long as the investment will produce some income that is taxable"

As i see it, it is not a dispute whether you claim the interest on investment loan, but rather whether you should pay tax on capital gain.


That is a guide, and a guide only.

The IRD is not bound by such 'guides' or any statements made by IRD staff. Trust me, theres a bunch of court cases on it.

Interest is only deductible to the extent it is incurred in deriving gross income. The Income Tax Act and GST Act are the only documents under which your taxability (or your right to deductions) is determined.

You probably can deduct all the interest if you use it only to produce dividend income - or like in the bond example.

[thereslifeafter87]

Hmmm,
I wonder if I could deduct part of my student loan interest when I finish studying because I use it to invest in dividend paying shares?

That would be wicked if I could!

[thereslifeafter87]

As a continuation of my other post,
the reason for that rule is that people may borrow money at 9%, invest it in a share yielding 5%, and claim the 4% difference as a set off against other income. The IRD don't like this...

[warthog]

quote:Originally posted by thereslifeafter87

As a continuation of my other post,
the reason for that rule is that people may borrow money at 9%, invest it in a share yielding 5%, and claim the 4% difference as a set off against other income. The IRD don't like this...


Fact: you don't know this, and I'm not sure why you are pretending to.

If one borrowed money at 9% and invested it in a share yielding 5%, why shouldn't the 4% difference be a legitimate expense claim?

What if you expected the 5% share to appreciate significantly in price?

The earlier bonds example is a good one: there is clarity.

[marcus_milo]

quote:Originally posted by thereslifeafter87

Hmmm,
I wonder if I could deduct part of my student loan interest when I finish studying because I use it to invest in dividend paying shares?

That would be wicked if I could!



Of course one can do anything, legal or illegal, and IRD will never know, unless you are audited...

[marcus_milo]

quote:Originally posted by blackcap

Fair enoug Marcul Milo

but surely you pay tax on dividends do you not?

Thus investing in a share portfolio is providing you with taxable income. Even without the capital gain.

Just like if you borrowed $100,000 at 8% to invest in $100,000 worth of bonds at 10%. You pay tax on the 10% but may deduct the interst paid on the money borrowed.

Exactly! And you would pay tax on the profit, i.e. $2000. Except if you are non-resident for tax purposes and then the rules are very clear...you can not claim the costs of investing for dividends and interest.

[marcus_milo]

quote:Originally posted by thereslifeafter87

As a continuation of my other post,
the reason for that rule is that people may borrow money at 9%, invest it in a share yielding 5%, and claim the 4% difference as a set off against other income. The IRD don't like this...


Interesting thought. People that invest in rental properties do this all the time! I wonder how they convince IRD when they sell a property, that never made a cash flow profit, for a capital gain, that they do not need to pay tax on the capital gain.

[Insider]

Marcus, because it is a tax break offered by the govt to encourage
private investors to provide rental properties to people who cannot
afford, or do not wish to buy a house. It's a lot cheaper than providing housing for everyone.
Property is a bit different.

[thereslifeafter87]

Warthog,
After re-checking my Income Tax notes,
I am right that under Income tax Act DD1(1)(b) – you can deduct interest expenditure to the extent it is incurred in deriving Gross Income.

However, it appears I was wrong about hte application by the courts of this principle.. It is quite complex. The relevant case is

CIR v Brierley (Court of Appeal) (1990)
- Taxpayer borrowed to buy shares. Capital distributions & dividends received.
- CIR wanted to apportion the deductibility of the interest on basis that some distributions received were capital distributions and not taxable.
- The court held that the whole of the capital was engaged in producing Gross Inocme – the fact that some capital distributions received was not relevant. Cannot sever the capital gains purpose from the income producing purpose as there were not separate assets.


I would assume this applies where you get capital appreciation in the share price as well. I apologise for my earlier error. Sometimes the court is not as logical as it should be.




quote:Originally posted by warthog


quote:Originally posted by thereslifeafter87

As a continuation of my other post,
the reason for that rule is that people may borrow money at 9%, invest it in a share yielding 5%, and claim the 4% difference as a set off against other income. The IRD don't like this...


Fact: you don't know this, and I'm not sure why you are pretending to.

If one borrowed money at 9% and invested it in a share yielding 5%, why shouldn't the 4% difference be a legitimate expense claim?

What if you expected the 5% share to appreciate significantly in price?

The earlier bonds example is a good one: there is clarity.

[KJ]

I note from Lawso's first post that he was trying to establish whether or not traders did better than LT investors.He did not get any replies.

Recently,after having learnt some of the TA basics as an aid to FA,I have started to do some trading.I have set aside a specific amount for trading (15% of total)and only plan to trade coys that have strong earnings growth and are in an uptrend.

Some questions for experienced traders:
(1)Do you look to make a set % and sell immediately this is achieved?
(2)Do you have a time frame in mind to hold for?
(3)What is the average profit you look to make in a yr based on the sum invested?
(4)If you are a LT investor as well as a trader,which gives a better return?

[KJ]

Interesting...no response.I did read somewhere that 90% of traders lose money so this may be the reason.

[Longtack]

Some questions for experienced traders: I have some experience at trading and it's my preferred option.(1)Do you look to make a set % No and sell immediately this is achieved? No - to do that is unreliable - based purely on the sp mvmnt, vol, charts and maths (TA) signals. (2)Do you have a time frame in mind to hold for? Nope - see above and a little gut instinct.
(3)What is the average profit you look to make in a yr based on the sum invested? A better profit than any other investment - in reality I haven't been doing it seriously for long enough to determine PA but over the last 1/4 around 70% on PGG, HQP, NOGOC & MPM.
(4)If you are a LT investor as well as a trader,which gives a better return? LT doesn't suit me - impatient and irascible I yam.

and I always pay the correct amount of tax:)

[Longtack]

Wow 70%!! I must add that I had some leverage at usurous credit card rates for 6 weeks and had to pawn first-born to slavers.[:p]

[Dazza]

my total capital is around 10k. I did start worrying about paying capital tax on any NOG holdings etc etc...

should i be worried ppl?

or maybe just leave it for now, n set it out properly when my portfolio is a bit 'bigger'?

or i should get it into practice now

eg, having an investment and trading portfolio etc, aswell as keeping a diary etc etc?

[Longtack]

As has been said before, in theory it's your intention at the time you buy and the reason that you sell that makes the dif.
Keep the best records you can Daz and pretend you're the Taxman calling to audit you. Play it straight. Remember that any tax evaded can be extracted from you three-fold - or so I hear. Tax has buggered many small businesses and individuals through ignorance or hanky-panky.
$10k's a good start. How many in your portfolio?

[KJ]

Longtack-thanks for your reply-as I said I have just started out with trading.Have done 3 trades in Dec where I held shares for periods varying fron 3 wks to 6 wks with % gains from between 7% and 13% nett.On a pa basis these are all over 100% gain-As you can see I am still trying to work it out.

[Longtack]

KJ Posted - 21/12/2004 : 08:56:48 AM
I am still trying to work it out.

Me too KJ. Mine is real seat of the pants stuff sometimes - tread carefully.

[Dazza]

Hold-SKC/PBG/NOG/NOGOC/TEL/CEN
40-50% of weighting = NOG/Oc's
sold- FTX/WHS

[Longtack]

That's a lot to manage with your modest investment Daz' - and the brokerage! [:0]

[KJ]

Under "Investment Strategies"-"Buy & Hold sometimes works" there is a post on 24/11/04 by Aspex.
It is well worth reading and IMO full of very good advice on trading.

[zyreon]

use a 200MA it better than buy and hold [buy when price above, avoid (or short) when price below]

[zyreon]

and just say no to drugs ;)[8D];)

[Longtack]

"Reality is for people who can't handle drugs.";)[:o)]:)

[whiteheron]

KJ

By only trading with about 15 % of your portfolio and only trading in companies with strong earnings and in an uptrend you are unlikely to come to much harm unless there is a major overall market collapse

I will try to answer your questions , however , my answers will be flavoured by what has happened to me and my approach to trading eg I tend to specialise (at present ) in Australian mining companies , considered by many to be too risky / speculative --- but they can be very rewarding and provide excellent returns if you are VERY careful in your selections and do your research very thoroughly
I trade virtually every day , sometimes several times per day and have been doing so for the best part of two years
In that time I have learned heaps but do not consider myself by any means to be an expert

The following are my best shots at answering your questions

(1) I dont look to make a set % and sell when this is achieved
Every case is different , you may have to accept little or no return in some cases , but in others you may still wish to hold even when you are very much into the money
You just need to review the situation frequently , weigh up the options and probabilities and act accordingly
What frequently means can be different things to different people , for me it is at least daily and sometimes several times daily

(2) My time frame can be from a few days to several months , sometimes longer if a share still meets my criteria and is still in a nice uptrend
Nothing in this game is capable of being kept to defined boundaries , every case has to be treated on its merits (or demerits , in which case the best option invariably is to quit quick smart when the custard comes into sight and to move on )
I have found that you must follow winners and not losers --- you are much better off to put your money into a winner than to stick with a loser
Never be too proud to quit a losing position , a mistake that many investors make

(3) This is a difficult one
I probably have not been at the game long enough to give an answer that would hold good over a full market cycle
The best I have done is a raw return of about 12 % over two months , but that was skewed by WMR and a couple of other beaut trades
On the other hand when I started out I lost money , basically for two reasons , lack of experience and poor markets at the time
I do know that a friend of a friend of mine made close to 100 % annualised when the markets were in a high growth phase , but struggled to make 15 % when the markets were in a long downtrend
If I can make around 30 % to 40 % per annum over the long term , say 20 % to 30 % or so above a rate of interest return then I will be a happy man
But the return is likely to fluctuate markedly over a full market cycle ( and time will tell )

(4) Long term v trading
This will be argued about forever
I guess I must favour trading , but then I have some time to put into it as I am semi retired
I acknowledge that long term probably suits most

I could say a lot more , but as I am near the worlds worst typist that is about my limit

Hope my comments have been of some use

Good trading

(3)

[Longtack]

and a big "Ta" from me too Fredbare as it confirmed a lot of what I believe.

[KJ]

Fredbare-thanks very much for your reply-very helpful.

I guess its fair to say that many LT investors would be returning 40% plus.Given the tax issues with trading you would need to make considerably more than this to compensate.

I will cautiously give it a try.

[whiteheron]

KJ

40 % plus for LT investors is pretty steep in my opinion , maybe attainable over a bull run but not in the longer term I think

I would like to hear if anyone has been managing that over say 5 years (not since March 2003 , as the period since then has shown exceptional growth and that is not representative of a full cycle )

[KJ]

Fredbare-I agree-in commenting on 40% plus I was referring to the last 12 mths.Any worthwhile measure would need to look at a period of say 5 yrs and it is my guess that better than 20% av over this period is a very good result.

Would be good to hear from others.

[Longtack]

Agree

[Naylz]

i'm definitely going to be regarded as a trader. I have been buying and selling shares since 1 April this year.
I'm not sure how this will work for tax purposes so someone in the know please help.

eg
bought POT $29,9K @ 5.05 sold 29,9K @ 5.32
bought POT $29,9K @ 4.75 sold 29,9K @ 5.06
bought POT $29.9K @ 4.65 sold 29,9K @ 4.85
bought POT $29.9K @4.51 and holding at present
expenditure -income = $29.9K but I am holding a lot more shares in POT
Done a similar thing with FBU on the way up?
Will i be taxed on the capital gains? no monetary profit realised just more shares?

[Snow Leopard]

You are taxed/rebated at your marginal rate on the realised gains/losses when you sell the shares.

Assume you bought 5920 shares at 5.05 and sold 5620 at 5.32.
Your profit there is 5620 * ( 5.32 - 5.05 ) = $1517.4
repeat for your other trades, adding profits subtracting losses. Also deduct the expenses of trading from your profits i.e. brokerage, investment magazines etc. What is left is taxable.

[Snow Leopard]

You might be wise to find an accountant

[Naylz]

have one for my normal work PT, guess i'll have to tell him all about this as well. damn...

[Snow Leopard]

Looking at the POT chart since April-1.
How the fish did you pick the top three times out of three?
Your bottom picking seems exceptional as well ;)

[tsb]

As a non trader my trust averages 9.5% after tax.

tax is collected through witholding tax - I have 40% in apt
16 trades last year about 5 only were sells

no expences other than brokerage.

I only spend a few minutes a day on "research'

[Naylz]

was a few cents out each time PT.. same with FBU, absolute luck, reading all the books about sharetrading they do say not to go with feelings however thats all I did this time... bound to get burnt that way sometime.. I'm a gambler by nature but decided i've donated enough to skycity and the odds must be better in the sharemarket.(wonder if my casino losses can be used as a tax deduction) been watching things for a while but the only way to learn is to actually do it.. lets see how I am at the end of the year.. started in this financial year (april)

Naylz Some countries do recognize proffesional gamblers for tax purposes ask IRD if you can become one.

[Minerbarejet]

hey moosie I found one for you. maybe we could all use this instead of PEB eh bro

[Minerbarejet]

You might be wise to find an accountant
Agree. A good tax accountant will save you a lot of money in the long run. if you run your sharetrading as a business you will be able to claim losses (ON PAPER) against profits (on Paper or taken) In other words at tax time evaluate the share price of all holdings at 31/03 Those that are down can be offset against those that are up or have been sold at a profit. This then becomes an annual event for you - you are legally a trader and liable for tax on profits as you are a business.

[GTM 3442]

As I understand it, the test is whether you bought the shares with the intention of selling.

As a "policy", I don't do this, and have a documented strategy of "buy and hold for future dividends". But with the caveat that if the price has risen to a point where the capital gain would cover x years future dividends, then I will consider selling. Or if the price falls by x% I will consider selling to preserve capital.

Easy to work out with TPW with a historical 40cps pa dividend and a known purchase price, tricky with PEB with no dividend history.

But it just might come in handy one day to have this "policy" documented

[CJ]

Agree. A good tax accountant will save you a lot of money in the long run. if you run your sharetrading as a business you will be able to claim losses (ON PAPER) against profits (on Paper or taken) In other words at tax time evaluate the share price of all holdings at 31/03 Those that are down can be offset against those that are up or have been sold at a profit. This then becomes an annual event for you - you are legally a trader and liable for tax on profits as you are a business.I though gains/losses for traders were only taxed on a realised basis, not unrealised.

[Minerbarejet]

If your ABC (depreciates) from 1.00m to .50 as an example and sits there at 31/03 then that is its value. As I understand it, and my accountant has been doing this for years, this (reduction) in value can be offset against any instance where XYZ has (increased)from say 1.00 to 1.75 leaving you with in simplistic terms tax to pay on .25c. The obvious kicker is if ABC goes back up again from .50 to 1.25 and is there at 31/03 the next year or you have sold in the interim at that price then you will be required to pay tax on .75c profit. This can then be reduced by the all the shares that have fallen in value in the year and still holding presumably ( or stop losses kicked in). This amount is then added to by all the ones that have gone up and sold or still hold at 31/03 the next year. You can of course claim business expenses, portions of power, phone, internet, computer food, postage etc against any profit. This seems to be a good way to write off dogs like ALF and believe it or not SCF PP shares (once again they were bought with the INTENTION of making a profit) How wrong I was.

[Jay]

I though gains/losses for traders were only taxed on a realised basis, not unrealised.
You can choose either if yoiu are a "sole Trader" but have to use unrealised if trading as a company is what I understand

[janner]

hey moosie I found one for you. maybe we could all use this instead of PEB eh bro

I have no idea what you are talking to moosie about..

BUT !!..

Thank you majorbarejet for resurrecting this post.. It covers 2004 to 2005.. With Q and A from many that no longer post here..

Having taken the time to read all of those posts.. I think that I can reccommend it to Newbies.. and Oldies..

Some of the posters are still here.. The Famous " Paper Tiger " is one..

With some very good information for many new ( and old ) Traders/Investors.. ..

Of course there have been changes in laws.. Much easier to talk to your accountant if you have at least a small understanding as to which way is up.. ..

A good thread that needs to be carried on .. IMHO :_)

[Minerbarejet]

Seemed appropriate and didnt take much finding. Moosie et al have been going on about tax on the PEB thread. Just trying to tie up some loose ends - so far Im a frayed knot

[BIRMANBOY]

So if you tie two loose ends together are you just going in a circle?
Seemed appropriate and didnt take much finding. Moosie et al have been going on about tax on the PEB thread. Just trying to tie up some loose ends - so far Im a frayed knot

[Minerbarejet]

So if you tie two loose ends together are you just going in a circle?444
lol .They have to be on the same thread.:D

[janner]

444
lol .They have to be on the same thread.:D

Right said Fred !!.. :-))
.

[janner]

Good to know that you and moosie do not have a private thread all to yourselves..

More posts please from all and sundry..

Not a newbie post.. not for experienced posters/Traders/investors.. .. Unless willing to answer a few dumb questions..

Which we would really like to ask.. :-))

Come on people... Live and learn.. Ask away..

[BIRMANBOY]

Ok dont say we didnt warn you!!
http://cdn.gunaxin.com/wp-content/uploads/2012/10/Winnipeg-Jets-Mascot-Mick-E-Moose-Jail.jpg


Never mind, found the answer here:

http://www.guide2.co.nz/money/questions/tax/at-what-point-does-a-stock-trader-need-to-pay-tax-on-profits/6/11477

I think once I start making some serious money I will go to an accountant. Right now I would like to spin the wheel of risk please!

[Minerbarejet]

Never mind, found the answer here:

http://www.guide2.co.nz/money/questions/tax/at-what-point-does-a-stock-trader-need-to-pay-tax-on-profits/6/11477

I think once I start making some serious money I will go to an accountant. Right now I would like to spin the wheel of risk please!
thought you were out chasing flamingos or beavers
Moosie, at some point you will have to bite the bullet so to speak and make a declaration one way or the other. If you are a trader and I suspect by what you say you are (I could be wrong)
then maybe you should get a hold of a good accountant (know any Exclusive Brethren)
(seriously) and save yourself a lot of shall we say disharmony.
Onwards and Upwards NTL:D

[Minerbarejet]

Ok dont say we didnt warn you!!
http://cdn.gunaxin.com/wp-content/uploads/2012/10/Winnipeg-Jets-Mascot-Mick-E-Moose-Jail.jpg
nice one lmao

[bonne vie]

Following on from Sparky's post #705 on the PEB forum where he mentions keeping a record of the reason for selling other than "I am taking profit" I would appreciate Sparkies or other comments whether the following comments could cover off low level of trading (I suspect not). I can show all profits reinvested to diversify and grow share proceeds for retirement funding. All transactions to/from shares/direct broking call account.

Reason for portfolio - provision of funds for retirement
Sale reasons:
To enable diversification of portfolio (when selling for profit to re invest)
Funds considered to be at risk (when selling at a loss (although not a tax issue)

Background Prior to 01/2007 all my share investments (ex KFL) were via AMP Unit Trusts & Retirement. 01/2007 I took out all Unit Trust funds and placed the proceeds in the bank - initially with the idea of purchasing USD but ended up leaving it in the Bank until 05/2008 when I decided to enter the sharemarket by investing directly. Purchased a relatively small value portfolio spread over 7 companies. Between 05/2008 and 01/2011 I rode out the GFC, participated in share offers from existing portfolio companies and participated in all dividend re investment schemes. Since 01/2011 I have grown the portfolio value and diversified to hold 17 companies by continuing re investing dividends, funding new shares from sale proceeds (mainly Xero) and trading a little (again mainly Xero - out now too dear). Over that time I have had losses - like Rakon and others I have decided to quit at a loss for better opportunities. For info I have been relatively conservative and yes I would have been better not to trade and have kept my Xero's shares - such is hindsight

[Minerbarejet]

Ok dont say we didnt warn you!!
http://cdn.gunaxin.com/wp-content/uploads/2012/10/Winnipeg-Jets-Mascot-Mick-E-Moose-Jail.jpg
Ive got it - its his bar moosevah

[Blendy]

bonne vie - you make an excellent point. I must talk to my accountant about this very sensible way of looking at it (and considering this is such a legal grey area anyway). As I trade regularly, my accountant says I am a 'share trader' and therefore pay tax on every transaction that makes a profit. But in fact, I never withdraw any money, I am simply diversifying my retirement portfolio (as this is instead of kiwisaver for me), and the money stays in my asb securities account until it is reinvested. Hmmm... Although would that mean that I would have to pay a potentially enormous tax when i finally withdraw this money in 30+ years if I decided I wasn't going to be paying any along the way??

[bonne vie]

bonne vie - you make an excellent point. I must talk to my accountant about this very sensible way of looking at it (and considering this is such a legal grey area anyway). As I trade regularly, my accountant says I am a 'share trader' and therefore pay tax on every transaction that makes a profit. But in fact, I never withdraw any money, I am simply diversifying my retirement portfolio (as this is instead of kiwisaver for me), and the money stays in my asb securities account until it is reinvested. Hmmm... Although would that mean that I would have to pay a potentially enormous tax when i finally withdraw this money in 30+ years if I decided I wasn't going to be paying any along the way??

As I mentioned in the post - I suspect the reasons listed will not be sufficient given the responses to Moosies comment #693 on PEB forum but then on the other hand Sparkies post indicates sale for consumption (i.e. overseas trip) would be - I would like to think saving long term to fund retirement is a more worthy cause. Noting of course in retirement only dividends would be used for luxuries and any capital sales proceeds would be for day to day living, emergencies etc ;)

PS Sparky I apologise upfront if I have misinterpreted your post

[janner]

Ive got it - its his bar moosevah

A Bar Miss Va.. I think..

[blobbles]

As I mentioned in the post - I suspect the reasons listed will not be sufficient given the responses to Moosies comment #693 on PEB forum but then on the other hand Sparkies post indicates sale for consumption (i.e. overseas trip) would be - I would like to think saving long term to fund retirement is a more worthy cause. Noting of course in retirement only dividends would be used for luxuries and any capital sales proceeds would be for day to day living, emergencies etc ;)

PS Sparky I apologise upfront if I have misinterpreted your post

bonnie I think it would all depend on the time frame, when it came down to it. If you were trading every day (like Moosie appears to be for instance), you are obviously looking for short term money and this could/should be taxed as capital gains. I think the IRD could claim this for a week or maybe month trades, or potentially 6 months. Less important, I believe, is that you were saving for your retirement or some such - I doubt they will be interested in the purpose of you saving money, only how the money is made and your intention upon buying shares.

But holding a stock for beyond 6 months, better a year, I think you would have a much better chance of convincing them it wasn't for capital gains only but you were looking for divies. There would be questions around why you sold (in an Audit situation), as Sparky alludes to, needing the money for something like a holiday is fairly obvious and therefore not as taxable. But you could easily say (as long as it was fairly provable, or better true) that the companies position changed and you were no longer confident of the dividends you originally invested for.

The good thing is that you could write off any losses, within the same tax year, as negatives to your profits. Which would mean that you would only pay tax on the net profit. In a case such as selling your Rakon shares, that's not bad.

Note that these comments are my understanding after talking to a few friends who are accountants when I quizzed them about the same thing before investing!

Which begs the question - if I make losses one year in the stock market, can I write that off against my income? Likely I only can if I am a sole trader, which technically I am as an IT contractor... but then I would have to invest as part of the business, a bit trickier but likely not impossible...

[Jay]

There was someone on here that mentioned that the IRD started asking questions about their Trust?? as they thought they had been doing too many trades to be considered an investor, mentioned recently, however the actual IRD incident was sometime ago.

Second minor point, gains on shares is considered income (not capital gains - we do not have an capital gains tax - sorry, just iiritates me a bit how most people call it capital gains) and hence why IRD thinks it should be taxed.
As has been dicussed many times before, the IRD decides if you are a trader.
Good post Sparky, again though the time frame is the key I think, you could not get way with the reasons if in and out of shares even on a monthly basis, let alone weekly or daily (On a regular basis not a one off).
And look out if your first return as a trader is a loss - they might just ask what have you be doing previously!

Lastly if "investing" under a company then its all a moot point.

[CJ]

Lastly if "investing" under a company then its all a moot point.Why - same rules apply dont they.

A few quick comments based on my view:
- the ultimate purpose (retirement, overseas trip) is irrelevant.
- As Jay says, 'capital gains' are deemed to be income gains if you are a 'trader'. For all intensive purposes however, I feel it is fine to refer to them as capital gains as it sets the distinction between share price gains and income flows from dividends etc.
- The purpose for selling is irrelevant, it is the reason you purchased that is important. However, this will be viewed objectively so the sale will help form the picture.
- Sparkies reasons for selling are based on the reason for purchase so support that argument (ie. the original reason for purchasing no longer applies so I sold). I think this can even apply to short term sales. Eg. I bought TME - I sold reasonable quickly (stupid I know) as I thought it was overvalued and the return I had got already exceed the regular income I expected for the next few years (stupid, stupid, stupid).
- As Mary Holme points out in that article, the whole distinction is BS as everyone who buys expects a capital gain, even if they say they just want dividends. However, the IRD seems ok with the short term:long term investor distinction.
- One are where I struggle is with growth stocks (ie. DIL, XRO, PEB). There is no expectation of dividends for a long time so even if you intend to hold for a long time, you are investing for capital gain, not income. Therefore shouldn't they be taxable regardless of whether you are a investor or trader?
- the test is on a share by share basis. However, hard to flip arguments unless there is a clear distinction. Normally separate brokerages accounts are recommended.
- Moosie - if you are in and out in less than a month, you are trading and subject to tax. No amount of made up excuses will make the IRD/Judge think otherwise.

[Minerbarejet]

Sweet, I will just start re-investing longer term and never taking money out (i.e. for retirement and primary fund compared to kiwisaver, even at age 26 if the IRD asks). I have yet to withdraw a single cent from my brokerage account and always top it up every month, so if any transactions are looked at the IRD could see I wasn't telling fibs. There is always a loophole in the law and this one is absolutely massive. I doubt a judge would scold a person my age and as part of a spend spend spend generation for saving so well...

Thanks for showing it to me guys!
dont forget you could claim back all those bottles of wine, steaks etc you have been giving the brokers (read fees).If you went down the trader route.
Pardon for asking but if you dont withdraw a cent why do you have to top it up or do you mean you drip feed a set amount each month:mellow:

[BIRMANBOY]

MVBJ...we are not worthy....SO a bat for the girls and bars for the boys...oy vay..better than a bris with a shotgun.
Ive got it - its his bar moosevah

[Queenstfarmer]

If one invests in two or three companies only...just as another would buy two or three rental properties then sell for a capital gain over a few years or so there is no tax to pay. The tax for the property investor would be on rental income...the tax for the share investor is from dividends (if any). But then!!!!. Buy 5 or 6 rentals or just do ups in a single year then its considered by the IRD to be a taxable income. In a conversation with my accountant only last week...we have decided to look at my Share investment just as we do my rental portfolio. I sold a house in Auckland last October for twice what I purchased it for...my plan over the next two years or so is to sell a reasonably large holding in a rural service providing company with the hope that its SP doubles in that time. Its a capital yes?

[Queenstfarmer]

Sorry...It's a capital gain yes?

[blobbles]

Good question moosie, I know on the income tax return there is a question along the lines of "Did you make any money from selling shares this year?"

Do people simply not declare that they made anything if they invested long term yet rebalanced and made a profit?

[Queenstfarmer]

The IRD question re profits from selling shares would then lead to ascertaining whether you had been a frequent trader in that financial year. In the case of a long term investor it would be classed as a capital gain. (www.enz.org)

[CJ]

Good question moosie, I know on the income tax return there is a question along the lines of "Did you make any money from selling shares this year?" Where. JUst had a look on the IR3 and couldn't find it. Definately not on the IR4 or IR6

[gv1]

Catriona MacLennan: Stop dodging tax and we can end child poverty
Hey don't rip off the poor.... Yeah right.

[BIRMANBOY]

So rebalancing is probably fine occasionally but if every time you rebalanced you made a profit a cynical IRD person might say "if you were "rebalancing" how come you never rebalanced down incurring a loss? One might have a more substantial negotiating position if in fact you can show that you did rebalance a few times at a loss. "Perception is everything but the IRD is much more perceptive than you or I"
Good question moosie, I know on the income tax return there is a question along the lines of "Did you make any money from selling shares this year?"

Do people simply not declare that they made anything if they invested long term yet rebalanced and made a profit?

[BIRMANBOY]

Another point worth considering is if one "rebalanced" and the three weeks or 3 months later went back into the same share..its starting to look and smell like you are or might be trading. You'd have a hard time convincing me otherwise anyway.

[BIRMANBOY]

I bet your company does:)
I don't own any shares, luckily.

[Food4Thought]

I made a good or bad decision?

[fungus pudding]

I take re-investing profits as a business would; it is not taken as income so, concordantly, is not declared. My father owns a motel and re-invests pretty much everything. Is on a lower tax rate than moi yet makes A LOT more!



The money he spends on r and m is part of his turnover but not taxable income. (It can and should be deducted from his income). If he is deducting capital expenditure from his income, he may well be paying less tax than you although earning more. He may also be locked up in the near future, because that's very naughty :-(

[BIRMANBOY]

Huh? what are you referring/responding to? You may know what you mean but its not readily clear which post.
I made a good or bad decision?

[BIRMANBOY]

Profits is not income... Income from selling services/products may well generate profits. Income you pay GST on (less expenses). At the end of the year all the income minus all the expenses/depreciation etc etc will produce a figure which is taxable profit. All income must be declared. Re-investment has got nothing to do with anything...unless its re-investing of non-declared income. This of course would be extremely risky and IRD have very hefty penalties for those who get caught
I take re-investing profits as a business would; it is not taken as income so, concordantly, is not declared. My father owns a motel and re-invests pretty much everything. Is on a lower tax rate than moi yet makes A LOT more!



If the IRD come knocking I will tell them the Internet Clown told me to do it ;)

[CJ]

I am still unconvinced that I should be paying tax on my gains. Anyone else want to try and explain in really simple terms? (I hate accountancy with a passion, especially since an accountant stole my last partner from me! Although it was kind of a blessing in disguise...)Why - you are clearly a trader. You are buying the share with the sole purpose to sell for a profit (in a short period of time). Based on your comments on this forum, there is absolutely no doubt.

[BIRMANBOY]

Moosie, you need to bite the lethal speeding projectile. You are confused as are many people. To absolve yourself from blame speak to a chartered accountant who (1) has expressly informed you that they have experience in share trading/investment. (2) take all of your records (assuming you keep them):scared: (3) have them send you a signed letter breaking down your position and explaining what you have been doing. Now this will probably cost you $150 or so but will put your mind at ease which is worth a lot more than that small amount. Perhaps try a female accountant this time.

[CJ]

Look on the bright side. You only pay tax if you make money....
Nailed it. Paying tax is a good thing if you are a trader!!

[janner]

majorbarejet... Take bow...

You have managed to have more response on this " OLD " thread in a few days .. Than it had in almost it's entire previous life..

Questions and answers are coming through..

Great for all of us.. Thanks again MBJ..

[janner]

Nailed it. Paying tax is a good thing if you are a trader!!

But Sir !!.. I am an investor.. !!.. Only in Dividend producing companies.. I worry .. and worry.. and change my mind . Frequently..

With so many crooks around plying for my money.. How can I not but help to PROTECT my meager savings ??

Even Bill Sykes " reviewed the situation ".. Losing all in the end.. :-))

[janner]

NO !!!.. It was FAGIN .!!.. Brilliantly played by Bill Sykes..

The message is the same.. Can we not change our minds frequently with out being a TRADER ..

[Minerbarejet]

majorbarejet... Take bow...

You have managed to have more response on this " OLD " thread in a few days .. Than it had in almost it's entire previous life..

Questions and answers are coming through..

Great for all of us.. Thanks again MBJ..
I was only trying to get PEB out of being a tax thread having been guilty of offthread comments myself. Pretty obvious there is need for a separate thread for this subject but thanks anyway and nice of you to say so. :D

[janner]

No.. I disagree MBJ.. This thread has come to life..

We all have terrible thoughts at the back of our minds .. IRD !!.. IRD !!.. IRD !!...

Where better to find advice ?? Many with no experience.. Many with VAST experience..

With a Government that has it's back to the wall.. Rapaciously seeking money from where ever.. i.e. Car Park Tax..

Cell phone TAX.. etc.. etc.. We not only need to understand these idiotic IMPOSTE'S..

But how to turn it back on to the IDIOTS that pass such laws..

Law pending .. FFS !!!..

[Minerbarejet]

lol, two mooses in a jail cell in NZ. Sounds like the start of a bad joke...

His accountant tells him to do it, so guess he will be joining him!

I am still unconvinced that I should be paying tax on my gains. Anyone else want to try and explain in really simple terms? (I hate accountancy with a passion, especially since an accountant stole my last partner from me! Although it was kind of a blessing in disguise...)
Moosie, moosie, moosie, oi
This does not add up
you buy
you sell at a profit
taxman wants some
you pay or else
end of story
amen
this is probably an antlerclimax for you:D

[janner]

Moosie, moosie, moosie, oi
This does not add up
you buy
you sell at a profit
taxman wants some
you pay or else
end of story
amen
this is probably an antlerclimax for you:D

MBJ.. moosie is now digesting your words.. Antlers he may understand.. Climax could be a problem.. :-))

[CJ]

We all have terrible thoughts at the back of our minds .. IRD !!.. IRD !!.. IRD !!...

And don't forget the success they are having with anti avoidance cases. IRD are on a roll and getting more and more money to find more non-compliance.

There computing power is also increasing. Like their request to the Land Transfer Office, what's to stopping them asking Computershare for a list of all trades for a 2 year period. They then start with everyone with more than 100 sales in that period. Then those with 50 sales get letter....

If you get that letter, you then have to prove you are not a trader. Technically the onus of proof is on IRD (unless they claim avoidance/evasion) but when have IRD ever worried about a technicality.

As they catch a few people, and back tax starts flowing in, they are allocated more money/investigators and everyone with more than 20 sales gets a letter.

Not that someone with 100 sales can't be an investor, but unless you manage a lot of money, odds on you aren't.

[Minerbarejet]

hey moosie - good news from taranaki - its raining

[BIRMANBOY]

They dont care about your "savings" all they care about is the profit that is generated when you buy and sell. Thats not your savings. You accept the IRD taxing your work salary...this is no different. Its like part time work but better because its fun and intellectually stimulating and you dont have to kiss your bosses arse. As has been pointed out several times they are only after it if you make a profit.
lol thanks for the advice guys. if I've got away with it this long and now am looking at long term investing who knows? lord knows I sell more than 20 times a year! what I don't get is why the government gets a cut? in my case this is my savings that have already been taxed from my job and I am taking all the risk, so the government is just skimming for the favour of allowing me to trade! you can see why I am so reluctant now

[CJ]

lol thanks for the advice guys. if I've got away with it this long and now am looking at long term investing who knows? lord knows I sell more than 20 times a year! what I don't get is why the government gets a cut? in my case this is my savings that have already been taxed from my job and I am taking all the risk, so the government is just skimming for the favour of allowing me to trade! you can see why I am so reluctant nowYou put money in the bank who pays you interest, predominately to compensate for inflation, and the government even taxes that.

Plus remember the concept of trader vs long term investor is that trading is like a second job, and the income (increase in share price, plus dividends if any) should be taxed.

If that is you only reason, you are fighting a losing battle.

[noodles]

I don't see what the big deal is. You pay a percentage of your profits as tax. Just lever yourself up another 30%

You will make the same money and tax won't cloud your investment decisions.

[JBmurc]

Nailed it. Paying tax is a good thing if you are a trader!!

yeah been a Trader for some 5yrs+ I'd be happy to be paying a massive TAX bill ...looking like a 2nd year of making a loss ....and increasing my TAX credits ....but have paid some good size TAX in the past 70-80k
bring on the 100k TAX BILL

[777]

And ACC levies can come into the calculation as well as they see you as running a profit entity.

[JBmurc]

And ACC levies can come into the calculation as well as they see you as running a profit entity.

Yeah think my levies were round couple hundred per year

[noodles]

And ACC levies can come into the calculation as well as they see you as running a profit entity.

On the other side of the ledger, you can claim brokerage, internet, home office, depreciation on computer gear, and many other legit costs as an expense. It also opens up trading platforms where you can use cfds and the massive leverage it provides

[Minerbarejet]

right on noodles

[777]

This put out by WHK is of interest regarding Tax.

http://www.whk.co.nz/images/WHK_Group_-_Sharp-As_Tax_-_2013_Issue_7.pdf

[Jay]

M900, the above, imho, has nothing to do with trading of shares and the taxing or non taxing thereof.
It is soley talking about the Cash Management (call account) account and how the "interst" is treated depending on what tax rate you advise etc

[Jay]

Should have added the that Call account, being a PIE, is similar to a Unit trust and hence the wording of Investment, investors etc.
The tax liability they tak about is this - again imho - they pay "interest" on the account monthly but do not deduct tax from it at the time.
At the end of the year (31 march) they will usually (point 1 above) deduct the "tax" owing on the interest the acouunt has earned over the year at your prescribed rate, or in cases of 2 & 3 mentioned

[BIRMANBOY]

ACCOUNTANT....NOW.....enough with the squirming, ostrich like behaviour.
Answers for questions on tax regarding share sales (thnaks to Direct Broking):



Your Inland Revenue Department (IRD) number must be provided on your Direct Broking Call Account Application. Your Prescribed Investor Rate (PIR) is the rate at which income tax is deducted from income earned on your investment. You can elect a PIR rate of 0%, 10.5%, 17.5% or 28% p.a. and you will be asked to reconfirm this each year.

Please note; if an IRD number is not provided then tax is deducted at 28% p.a.

Investors with a PIR other than 0% are referred to as “tax-paying investors”.

The Direct Broking Call Account's tax liability on PIE income allocated to its tax-paying investors will be deducted at the earliest of the three following times in respect of each tax year. The tax liability will be deducted by cancelling units equal to the value of the tax liability:



At the end of the tax year (following 31 March normally);
Upon a full withdrawal; or
If at any time, especially upon a partial withdrawal (including standing redemptions) or upon a partial switch, the balance of the remaining units is, or could potentially become insufficient, to cover the Direct Broking Call Account's accrued tax liability on income allocated to such an investor. In these circumstances, this will be deemed a full withdrawal and tax will be deducted on account of the accrued liability. The Manager will consider potential market movements when determining whether the remaining units are of sufficient value to cover the tax liability.

A refund of tax will be provided to the Fund to compensate for PIE tax losses or excess tax credits (if any) relating to tax-paying investors, which is then allocated to such investors by way of issue of additional units.


The Fund will not cancel any units or otherwise adjust the interests of its zero rated investors for PIE tax, as the Fund does not pay tax on the income allocated to such investors.


Investors who have elected a PIR of 0% are zero-rated investors. Zerorated investors and trusts that do not select 28% must complete a tax return that includes PIE income or losses from the fund. These investors will have a tax liability in respect of the PIE income allocated to them, regardless of whether the Fund makes any distributions to them.


Investors must advise if their PIR changes. Failure to advise, or providing a lower rate than that applicable, will mean the investor is personally liable to pay any resulting tax shortfall, including penalties and interest, and may be required to file a tax return. Investors that provide a PIR that is too high will usually not be able to claim a refund for any excess tax paid by the Fund in most cases.
If the correct tax rate has been elected, the tax paid on income allocated to tax-paying investors will be a final tax and no obligation to file a tax return (in respect of this investment) will arise as a consequence.



Gutted if you're a 0% investor!!!;)

Thanks to everyone who contributed. Now I am of the assumption that I will be taxed upon withdrawal of money (which I never do). WIll this then be carried over to the next year, and the year after that, until I withdraw? Cheers!

[777]

If you look at your account on line it will have a balance that earns PIE income. This balance however is bigger than what you have available for withdrawal or further purchase of shares. The difference is the tax that will be paid to the IRD normally 31st March. That amount is also at the bottom of your statement.