PDA

View Full Version : Tax Question



ttw100
22-07-2009, 03:43 PM
I have a tax question I would appreciate some feedback on.

My question relates to seperating ones short-term trading for capital gain (i.e. capital gain taxable activity) from ones long-term investing for income (i.e. non-capital gain taxable activity). I have only embarked on the latter but now want to try the former using CFDs and a small amount of capital. I was thinking of using a company I control for the short-term trading and leaving the longer-term investments in my wife's name. However, it seems that this might not be sufficient to prevent us being liable for capital gains tax on the long-term investing, particuarly in light of the new associated persons tax legislation going through parliament currently.

I find the the lack of clarity in this area very frustrating. I am quite happy to pay CGT on my trading, but I don't see why this should taint my long-term investments if they would otherwise have been seen as not being subject to CGT. Given the use of different service providers (CFD vs broker) and different structures (personal versus company) I would have thought the distinction between activities was very clear but I know wonder if this is not the case.

Any comments from those more expereinced than myself would be much appreciated!

Cheers,

TTW100

fungus pudding
22-07-2009, 03:55 PM
I have a tax question I would appreciate some feedback on.

My question relates to seperating ones short-term trading for capital gain (i.e. capital gain taxable activity) from ones long-term investing for income (i.e. non-capital gain taxable activity). I have only embarked on the latter but now want to try the former using CFDs and a small amount of capital. I was thinking of using a company I control for the short-term trading and leaving the longer-term investments in my wife's name. However, it seems that this might not be sufficient to prevent us being liable for capital gains tax on the long-term investing, particuarly in light of the new associated persons tax legislation going through parliament currently.

I find the the lack of clarity in this area very frustrating. I am quite happy to pay CGT on my trading, but I don't see why this should taint my long-term investments if they would otherwise have been seen as not being subject to CGT. Given the use of different service providers (CFD vs broker) and different structures (personal versus company) I would have thought the distinction between activities was very clear but I know wonder if this is not the case.

Any comments from those more expereinced than myself would be much appreciated!

Cheers,

TTW100

Pedantic perhaps, but we do not impose a tax on capital gains in New Zealand. There is no such thing. However some activities attract income tax. It's hard to give a blanket rule; for instance if you have no other income then you are a sitting duck every time you trade. If however you maintain a large portfolio and occasionally sell to replace with another stock (rebalance) you'll get a fair bit of leeway. But really you're asking 'how long a piece of string is'. Get professional advice, and don't be scared to ask the IRD - just phone and don't identify yourself. They're usually quite helpful and while you won't get a decisive answer, you'll get some idea of the criteria they look for.

CJ
22-07-2009, 04:09 PM
As stated there is no CGT in NZ. When you trade, the gains/losses are treated as income.

Unlike land, there is no tainting. All you need to do is clearly show what the intention is with each portfolio. On the basis your CFD provider is separate to your normal broker, this should be easy.

shasta
22-07-2009, 04:23 PM
I have a tax question I would appreciate some feedback on.

My question relates to seperating ones short-term trading for capital gain (i.e. capital gain taxable activity) from ones long-term investing for income (i.e. non-capital gain taxable activity). I have only embarked on the latter but now want to try the former using CFDs and a small amount of capital. I was thinking of using a company I control for the short-term trading and leaving the longer-term investments in my wife's name. However, it seems that this might not be sufficient to prevent us being liable for capital gains tax on the long-term investing, particuarly in light of the new associated persons tax legislation going through parliament currently.

I find the the lack of clarity in this area very frustrating. I am quite happy to pay CGT on my trading, but I don't see why this should taint my long-term investments if they would otherwise have been seen as not being subject to CGT. Given the use of different service providers (CFD vs broker) and different structures (personal versus company) I would have thought the distinction between activities was very clear but I know wonder if this is not the case.

Any comments from those more expereinced than myself would be much appreciated!

Cheers,

TTW100

Check the newbie area for previous tax/company related questions.

http://www.sharetrader.co.nz/showthread.php?t=6758

I've answered a few in there ;)

adventi
24-07-2009, 02:55 PM
In the newbie area shasta says -- From the 1st April document everythign you do in a spreadsheet

Has anyone got a sharetader spreadsheet template that can be used to start from?

shasta
24-07-2009, 03:54 PM
In the newbie area shasta says -- From the 1st April document everythign you do in a spreadsheet

Has anyone got a sharetader spreadsheet template that can be used to start from?

You won't need a template to copy off, basically the paper/email contracts your broker sends you contains all the information you will need, ie.

Date, who you bought/sold, price, FX rate (if non NZ), brokerage

You can insert a column for Interest/Dividends rec'd, imputation credits, bonus shares, dividend reinvestment programs etc

I mentioned doing this as you go, as it's far easier than waiting until year end & trying to find all the paperwork!

newbietrader
24-07-2009, 06:59 PM
I'm a newbie here. Thanks for your input.
I'm not a trader and I work full time, usually hold for at least 2 or 3 months or more, depending on the news or switching my share portfolio.

With regards to share transaction, is it compulsory to declare the transaction of profit/loss in our yearly tax form ?

shasta
24-07-2009, 07:14 PM
I'm a newbie here. Thanks for your input.
I'm not a trader and I work full time, usually hold for at least 2 or 3 months or more, depending on the news or switching my share portfolio.

With regards to share transaction, is it compulsory to declare the transaction of profit/loss in our yearly tax form ?

If you're buy & selling shares with the intention of making a profit, then yes you should be declaring it in your IR3 tax return.

There is a large grey area surrounding all this, but i think its better to fess up & ensure you claim all expenses, than wonder if/when the IRD comes knocking.

By the way the best traders on Sharetrader largely do it for a living, it really does take alot of dedication & discipline to "trade" profitably, & not trying to put you off, but if you have limited capital or depend on the income it provides, then trading may not be for you.

I'm not a trader as such, but do from time to time take a short term punt

There are plenty on here who do just nicely with a "buy & hold" strategy.

Key is to find the style that suits your personality & risk tolerance & stick to your system.

fungus pudding
24-07-2009, 07:19 PM
I'm a newbie here. Thanks for your input.
I'm not a trader and I work full time, usually hold for at least 2 or 3 months or more ...........



Oh yes you are a trader.

newbietrader
25-07-2009, 01:18 AM
thx shasta for yr input.

So any profit you gain in a transaction is taxable. Is this called capital gain tax?

If one hold a share more than 1 or 2 years then decided to sell with some gain, should one declare the profit in tax return and be taxed? or need not declare it as this was a long term holding?
Still back to the main question does one need to declare the profit/loss of the transaction in tax return whether it's a short or long term holding?

cheers

fungus pudding
25-07-2009, 07:30 AM
thx shasta for yr input.

So any profit you gain in a transaction is taxable. Is this called capital gain tax?

If one hold a share more than 1 or 2 years then decided to sell with some gain, should one declare the profit in tax return and be taxed? or need not declare it as this was a long term holding?
Still back to the main question does one need to declare the profit/loss of the transaction in tax return whether it's a short or long term holding?

cheers

NZ does not have capital gains tax. Profits made in this way may be subject to income tax though. Whether it represents a large % of your income (you're definitely making taxable money if living off trading) whether vyou are reinvesting profits into the market, or another investment class, or going on a world trip - and several other factors, not least of which is what you wish to tell them! Professional advice is the answer.

newbietrader
25-07-2009, 08:22 AM
thnks for yr input fun..

I have a job, making it as my primary source of main income..and my share transactions have so far been no more than 5 in every year and the % gain earned (after minus losses) has been small, not even qualify as main source of income.

fungus pudding
25-07-2009, 08:59 AM
thnks for yr input fun..

I have a job, making it as my primary source of main income..and my share transactions have so far been no more than 5 in every year and the % gain earned (after minus losses) has been small, not even qualify as main source of income.

So frequency of trading starts to form a pattern, your intention at time of purchase comes into it.
If you bought with intention of holding - but then unforeseen need to sell arises, might eliminate tax. (you can be too honest). So professional advice, write down your intention every time you buy and sell, forget about a few things, use your imagination (AKA lying) But it is like asking how long is a piece of string; except string can be measured, but taxable income from investments? No two answers will ever be the same, including answers from IRD.

shasta
25-07-2009, 12:40 PM
thx shasta for yr input.

So any profit you gain in a transaction is taxable. Is this called capital gain tax?

If one hold a share more than 1 or 2 years then decided to sell with some gain, should one declare the profit in tax return and be taxed? or need not declare it as this was a long term holding?
Still back to the main question does one need to declare the profit/loss of the transaction in tax return whether it's a short or long term holding?

cheers

You first need to decide, do you really want to "trade", or "invest".

As a rough guide, buying & selling into the same stock will constitute trading. (Australia has a 50% deduction in CGT for stocks held over a year). Thats a good guide to use.

Trading gains = taxable income (it's not CGT as such, but sort of)

Investment gains are not taxable, but dividends/bonus shares are

If you haven't got a grasp of charts (ie Technical Analysis), then trading may not be for you.

What i would urge you to do is write down a list of criteria, that will form "your system". (The best systems will incorporate both technical & fundmental analysis, or TA & FA)

Instead of confusing yourself, write it down & stick to it - that removes the emotion out of your decisions.

Questions you need to ask yourself before making a decision...

* Why am i buying this stock?
* Why am i selling this stock?
* What is my risk tolerance? (setting stop losses for example)
* What is my exit strategy?

The answers to these will differ depending on whether you're trading or investing.

The key is identifying & deciding on what sector/company to buy in the first place, & make sure it fills within your criteria for selection.

Steve
25-07-2009, 07:19 PM
Life would be so much easier if all gains were taxed irrespective of intention!

(and any corresponding losses deductible for fairness)

shasta
25-07-2009, 09:36 PM
Life would be so much easier if all gains were taxed irrespective of intention!

(and any corresponding losses deductible for fairness)

Thats easy its called "trading"

fungus pudding
26-07-2009, 07:22 AM
Life would be so much easier if all gains were taxed irrespective of intention!

(and any corresponding losses deductible for fairness)

So a long term holder sells after 20 years. If he has made a 'gain' it is very likely a nominal one because of the eroded dollar value. That then becomes a tax on inflation, which was not the result of investors' actions.

Steve
26-07-2009, 09:15 AM
So a long term holder sells after 20 years. If he has made a 'gain' it is very likely a nominal one because of the eroded dollar value. That then becomes a tax on inflation, which was not the result of investors' actions.

Why not? I am not aware of any countries with a CGT that allow an inflation adjustment.

Studies have shown that countries with a CGT levelling the 'investment' playing field are better off as it takes away the investment distortion of a preference 'non-productive' investment such as residential property in the expectation of a tax-free gain over more 'productive' investments.

fungus pudding
26-07-2009, 09:44 AM
Why not? I am not aware of any countries with a CGT that allow an inflation adjustment.

Studies have shown that countries with a CGT levelling the 'investment' playing field are better off as it takes away the investment distortion of a preference 'non-productive' investment such as residential property in the expectation of a tax-free gain over more 'productive' investments.

Studies have also shown theat CGT dammages an economy as it stops things happening or slows economic activity.
Depends which studies you want to believe. NZ has got it right in my view, at least in theory, by applying income tax to habitual traders. In practice the IRD has been pretty slack in applying the rules.

fungus pudding
26-07-2009, 09:46 AM
Studies have also shown theat CGT dammages an economy as it stops things happening or slows economic activity.
Depends which studies you want to believe. NZ has got it right in my view, at least in theory, by applying income tax to habitual traders. In practice the IRD has been pretty slack in applying the rules.

P.S. IO should have added that real estate has no special treatment over any other investments such as shares, in spite of commonly held beliefs.

winner69
26-07-2009, 09:56 AM
........... habitual traders. In practice the IRD has been pretty slack in applying the rules.

Studies have also shown that 95% of traders lose so maybe the IRD have taken the holistic view that it would cost them money to subsidise losers

Spose that fact is true or why else would somebody wrire a book called 'Winning the Trading Game: Why 95% of Traders Lose and What You Must Do To Win'

Rif-Raf
27-07-2009, 07:31 PM
Why not? I am not aware of any countries with a CGT that allow an inflation adjustment.

Studies have shown that countries with a CGT levelling the 'investment' playing field are better off as it takes away the investment distortion of a preference 'non-productive' investment such as residential property in the expectation of a tax-free gain over more 'productive' investments.
When i lived in the UK in the late 80's CGT gains were calcuated after CPI adjustments.Makes sense, but meant the computation was very messy.

Rif-Raf
27-07-2009, 08:12 PM
So frequency of trading starts to form a pattern, your intention at time of purchase comes into it.
If you bought with intention of holding - but then unforeseen need to sell arises, might eliminate tax. (you can be too honest). So professional advice, write down your intention every time you buy and sell, forget about a few things, use your imagination (AKA lying) But it is like asking how long is a piece of string; except string can be measured, but taxable income from investments? No two answers will ever be the same, including answers from IRD.

I've always thought it would be a good idea if Direct Broking put in a comments field againsttrades so you could insert notes relevant for tax purposes which are stored against in the most convenient place.

CJ
29-07-2009, 07:44 AM
Why not? I am not aware of any countries with a CGT that allow an inflation adjustment. I thought the UK did indexing?

Newbie - are you buying for dividend income or are you buying for short term growth (3-4 months suggests this one). The grey area is where people invest for long term growth (ie. 5 years +) - technically this should be taxable but very few would admit it.

Once you have determined that, what you actual do becomes irrelevant (though actions may speak louder than words as to what your real intention is). that is, you buy a share for dividend yeild but then decide to sell after 3 months because you think another share has a better long term (dividend) prospect - this would be a treated as a long term hold even though you only held it for 3 months.

Confussed?

newbietrader
29-07-2009, 08:23 PM
"Newbie - are you buying for dividend income or are you buying for short term growth (3-4 months suggests this one). The grey area is where people invest for long term growth (ie. 5 years +) - technically this should be taxable but very few would admit it."

I hold long on a few shares (gas+oil) for dividend income..and i sell copper related share (after holding 3 months) after receiving news about copper price dropping, hence changing portfolio to gas+oil (to hold long term)...does this consider trading? thx

CJ
30-07-2009, 08:24 AM
"Newbie - are you buying for dividend income or are you buying for short term growth (3-4 months suggests this one). The grey area is where people invest for long term growth (ie. 5 years +) - technically this should be taxable but very few would admit it."

I hold long on a few shares (gas+oil) for dividend income..and i sell copper related share (after holding 3 months) after receiving news about copper price dropping, hence changing portfolio to gas+oil (to hold long term)...does this consider trading? thxThat should just be classed as a review of a long term portfolio so shouldn't be an issue.

Think about perceptions though as this is what an IRD auditor will start with. If someone asked for a list of all you buys and sells, would they think you are trading or holding long term. If the later, the IRD auditor will probably move on. If the first, then they will investigate further.