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mr.needs
16-04-2010, 02:29 PM
To date my share market activity has been limited to longer term value investing. I feel its time to have a go at some shorter term trading.

After a bit of thought I have decided it will be best to separate my investing and trading activities by setting up a company to do the trading. The company will pay the capital gains tax on trades, providing a clear distinction to the tax man what my trades are and what my longer term investments are.

I actually have no idea how to go about setting up a company. I assume you need an accountant to register your company with the companies office and prepare financial statements, tax etc. I'm sure there are some here who could shed some light on the process.

I am still a student, and I only have around 25k invested (so far), so I'm not after the most expensive accountant out there. I am however prepared to pay what it costs for an accountant who can do the job, and do the job well!

I don't plan on starting to trade immediately. I want to gain experience through paper trading to refine my strategy before I commit any hard earned cash. Do you think I would be better waiting until I'm fully ready before forming the Co. Or are there advantages to setting it up now. E.g. could I could I depreciate laptop, pay for internet connection, books etc. to offset future tax liability? I would incur those expenses regardless.

Thoughts?

fungus pudding
16-04-2010, 02:50 PM
To date my share market activity has been limited to longer term value investing. I feel its time to have a go at some shorter term trading.

After a bit of thought I have decided it will be best to separate my investing and trading activities by setting up a company to do the trading. The company will pay the capital gains tax on trades, providing a clear distinction to the tax man what my trades are and what my longer term investments are.

I actually have no idea how to go about setting up a company. I assume you need an accountant to register your company with the companies office and prepare financial statements, tax etc. I'm sure there are some here who could shed some light on the process.

I am still a student, and I only have around 25k invested (so far), so I'm not after the most expensive accountant out there. I am however prepared to pay what it costs for an accountant who can do the job, and do the job well!

I don't plan on starting to trade immediately. I want to gain experience through paper trading to refine my strategy before I commit any hard earned cash. Do you think I would be better waiting until I'm fully ready before forming the Co. Or are there advantages to setting it up now. E.g. could I could I depreciate laptop, pay for internet connection, books etc. to offset future tax liability? I would incur those expenses regardless.

Thoughts?

For a kick off you will not pay capital gains tax. There is no such tax in NZ. What you will pay is income tax on capital gained if you are a trader. Either a lawyer or accountant will advise you on the pros and cons of setting up a company. It's a simple process, so stay away from the big firms - they charge like wounded bulls. Legal and accounting charges are directly related to the distance from their entrance door to the receptionist's counter, and the depth of the pile on their carpet.

mr.needs
16-04-2010, 04:07 PM
Legal and accounting charges are directly related to the distance from their entrance door to the receptionist's counter, and the depth of the pile on their carpet.

Haha thanks for the insight! Will keep that in mind.

shasta
16-04-2010, 08:28 PM
To date my share market activity has been limited to longer term value investing. I feel its time to have a go at some shorter term trading.

After a bit of thought I have decided it will be best to separate my investing and trading activities by setting up a company to do the trading. The company will pay the capital gains tax on trades, providing a clear distinction to the tax man what my trades are and what my longer term investments are.

I actually have no idea how to go about setting up a company. I assume you need an accountant to register your company with the companies office and prepare financial statements, tax etc. I'm sure there are some here who could shed some light on the process.

I am still a student, and I only have around 25k invested (so far), so I'm not after the most expensive accountant out there. I am however prepared to pay what it costs for an accountant who can do the job, and do the job well!

I don't plan on starting to trade immediately. I want to gain experience through paper trading to refine my strategy before I commit any hard earned cash. Do you think I would be better waiting until I'm fully ready before forming the Co. Or are there advantages to setting it up now. E.g. could I could I depreciate laptop, pay for internet connection, books etc. to offset future tax liability? I would incur those expenses regardless.

Thoughts?

You can set up a simple company online for $60, by using the companies act & not your own constitution.

I'll help you in settings things up if you like, i'm an Accountant & happy to help.

Won't cost you a cent, Sharetrader isn't here to promote individuals it's here to share the good oil & help others

percy
16-04-2010, 09:14 PM
You can set up a simple company online for $60, by using the companies act & not your own constitution.

I'll help you in settings things up if you like, i'm an Accountant & happy to help.

Won't cost you a cent, Sharetrader isn't here to promote individuals it's here to share the good oil & help others
Shasta, I take my hat off to you for helping a new investor/trader.
Mr.needs,go for it you are in capable hands.Laying the ground work will save you a lot of headaches.

mr.needs
17-04-2010, 10:14 PM
You can set up a simple company online for $60, by using the companies act & not your own constitution.

I'll help you in settings things up if you like, i'm an Accountant & happy to help.

Won't cost you a cent, Sharetrader isn't here to promote individuals it's here to share the good oil & help others

Thanks for the kind offer shasta. Much appreciated :)

I will send you a private message.

DecentTown
08-10-2010, 11:53 AM
Hi Shasta - Probably a silly question, but if you set up a company and trade through that vehicle, how do you transfer funds out of the company and back to yourself from a tax perspective. For example, if you have a good few months trading through the company and make 50k profit, how would the tax on the profit (income) be paid typically? If the company is liable for the income tax then fine, but how would any funds being transferred out of the company and into the individual's name be treated/classed? Presumably the individual would not have to declare the funds once again to the taxman and pay another lot of income tax?

CJ
08-10-2010, 12:39 PM
Hi Shasta - Probably a silly question, but if you set up a company and trade through that vehicle, how do you transfer funds out of the company and back to yourself from a tax perspective. For example, if you have a good few months trading through the company and make 50k profit, how would the tax on the profit (income) be paid typically? If the company is liable for the income tax then fine, but how would any funds being transferred out of the company and into the individual's name be treated/classed? Presumably the individual would not have to declare the funds once again to the taxman and pay another lot of income tax?IF there is a shareholders loan to the company, the loan can be repaid.

Alternatively, a dividend can be paid. It will be taxable but you should be able to attach imputation credits which are accumulated in the company via the tax it pays.

DecentTown
08-10-2010, 12:58 PM
IF there is a shareholders loan to the company, the loan can be repaid.

Alternatively, a dividend can be paid. It will be taxable but you should be able to attach imputation credits which are accumulated in the company via the tax it pays.

Thanks CJ. That makes sense.

STRAT
08-10-2010, 03:21 PM
Good on ya Shasta. I met Mr Needs when I went to a Wellington ST meeting. Hes a charming bloke.

JemT
10-07-2011, 08:04 PM
May I ask how everything worked out (or is working out)? I am in the process of trying to determine whether a company will be an appropiate vehicle for holding the investments of someone I know. To set one up is extremely simple, but some of the record keeping and financial statement preparation can be troublesome. The other option would be to use a trust, which generally involves higher start up costs but has minimal statutory requirements in terms of reporting etc.

A common misbeleif is that setting up a company will entitle you to extra deductions. Tax is entity neutral, so there is no need to set up a company before you start depreciating your laptop and claiming home office expenses.

shasta
12-07-2011, 03:46 PM
May I ask how everything worked out (or is working out)? I am in the process of trying to determine whether a company will be an appropiate vehicle for holding the investments of someone I know. To set one up is extremely simple, but some of the record keeping and financial statement preparation can be troublesome. The other option would be to use a trust, which generally involves higher start up costs but has minimal statutory requirements in terms of reporting etc.

A common misbeleif is that setting up a company will entitle you to extra deductions. Tax is entity neutral, so there is no need to set up a company before you start depreciating your laptop and claiming home office expenses.

Exactly you do not need a company to trade, the changes to the LAQC rules have also removed a key benefit of using a company to trade (but the emphasis should be to pay tax & make money!)

Unless your financial situation warrants the use of a company, ie, to separate share trading from other business affairs, it is alot easier to keep things in your own name, up until the costs & adminstrative hassle of setting up a company/trust becomes worth it.

In the past a company offered tax incentives over trading as an individual but as National has smoothed the tax rates its levelled the playing field

We now have Limited Liability Partnerships & these now operate more closely to a company than the previous partnership structure, & should also be looked into as an option when considering a company set up.

It seems the two main points people ask over & over is, do i need a company, & focussing on minimising tax.

Tax alone should never be the reason to set up a structure, if you are trading you want to pay tax cos you are making money!

A Trust should only ever be used, as part of the overall financial planning of a family situation, mainly for asset protection from other business activities.

Trustees have to act in the best interests of the beneficaries & "share trading" & losing capital isn't really the point of a Trust, & can lead to legal issues for the Trustees.

Happy to answer more specific questions, but i've been out of the CA environment a few years now, hopefully CJ or Corporate are more up to date & can correct me!

JemT
12-07-2011, 05:32 PM
The very simple answer is- use a company if you are running a profitable operation and you personally are on the highest tax rate. However, on the whole a company can only defer tax being paid at the top MTR, as the profits need to be distributed at some stage. Sometimes, for example if you are approaching retirement or planning a break from working, it can be helpful to use a company that will retain profits at 28% tax, and then pay these out as dividends when you retire/stop working and are on a lower MTR.

Also you will want to use a company if there is any business risk inherent in your operations and a the limited liability a company provides will help to offset this. Note that most lenders will ask for personal guarantees whenever a closely held company borrows money, so the limited liability will not mean much. An LTC is beneficial when you are on a high MTR and the company is losing money.

The problem with using a company is that things get complicated in terms of record keeping and administration. For example, accounts must conform with various standards, and if they do not then the companies office will decline them and you can end up facing penalties sometimes. The same issue can arise with the IRD when you have not handled your affairs properly and you end up in all sorts of trouble. Of course you can pay an accountant to do this, but you are looking at a fee of $700-$1000 at the least.