From an IRD Questions we've been asked:
Quote:
Originally Posted by IRD -13 February 2004
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Looks like you may be right. Not an authoritative soucre but good enough for me. Extracts from the Mater Tax guide:
Quote:
Excepted financial arrangements
Last reviewed: 08 October 2013IT07 ss EA 1, EB 3(3), ED 1An excepted financial arrangement that is held as trading stock or revenue account property must be valued at cost. This category includes shares (other than a share acquired under a share-lending arrangement or a share-lending right), options, short-term trade credits, annuities, insurance contracts, gaming and lottery bets, emissions units and various agreements for the sale or lease of property. See s EW5
..., the value must be calculated using the first-in first-out (FIFO) method or weighted average cost method. In the case of shares, these methods apply on the basis of share types rather than across an entire share portfolio, eg where more than one parcel of the same type of shares is held.
Thanks guys.
I seem to take ages to try and find what I am looking for on the IRD site.
Use to use an accountant, he said you can use either cash or accural basis, unless you trade under a company then you must use accural basis, that is declaring unrealised losses/gain and each year you take take "cost" as the value at 31st March as you say Aaron.
(I am mainly a salary and wage earner.)
Overall I still make X profit or X Loss, but it is how I declare it each year.
Think I will use the weighted average method - easier to keep track of.
Yes you are right couta1. Not my main source of income by a long stretch. Mainly held for the long term, still have a long term portfolio under a Trust but now trade some (under my own name) as well for extra pocket money/to supplement income when retired - althought that is a few or ten or so years away yet.
Rightly or wrongly, I started declaring the trades and so a bit hard to stop now but still carry on trading. Don't want to get "caught out" like w69, I think it was, did.
Jay (FYI), the accrual basis does apply to Companies but for share trading purposes, where the shares are considered to be "trading stock", they are valued at cost (see section ED 1 of the Income Tax Act 2007). Share are listed as an "excepted financial arrangement" and as such are excluded from the accruals basis. Its tricky stuff to understand, but that's my understanding of the accruals rules... happy to be corrected if I am wrong....:)
Re the "discussion"on Trilogy re investment and trading; i have tracked down this thread.Worth reading imo esp KW and Harveys and others.
This is the best summary of the situation. It should be noted however that the mere separation out of activities that are stated to be trading, (perhaps through a different broker) and those that are claimed to be investing in and of itself will not be considered to be a definitive sole measure of intention even if done so through separate legal entities, (for example by conducting trading through a company or trading trust). The argument that you can effectively and definitively separate trading and investing activities because they're traded through different accounts and brokers doesn't hold water of itself in as much as the fact that one's intention needs to be evidenced by one's investment behaviour, (actions speak louder than words as far as the IRD are concerned).
Further, even separating trading activities into a separate company doesn't disassociate you from your other trading by virtue of the associated person's test in the Income tax Act.
Put simply, while separating out activities is a good idea for active traders, your investing through your investment account will still be objectively measured if push comes to shove by the IRD based on the evidence of your investing patterns more than anything else not which account you invested through and if you buy and sell shares on a pretty regular basis in your investment account which you claimed were bought with the intention of being long term investments, the fact that you're trading through a separate account for really quick trades won't help you much, in fact it could be argued the IRD will use that against you and either by association, (associated persons test) or direct link between claimed left and right hand of the same individual, they could easily make the case that ostensibly all your activities are trading.
Its a murky area of the law and people would be well advised to take advice for their particular circumstances from a good quality accountant or tax lawyer with expertise in this area if they have concerns but in general if you are going to separate out your activities make sure your long term investing activities really are just that and when in doubt whether you'll be investing long term or not put it through your trading account so you don't taint your true investments.
In terms of what constitutes long term investment investors might want to consider the Government's moves in respect of the brightline test regarding property transactions. Anything sold within 2 years is automatically considered to be on trading account. This shouldn't be interpreted to mean that investors holding shares for longer than two years and one day are automatically exempt from trading, most especially so if they invested in growth companies that don't pay dividends
http://www.interest.co.nz/opinion/78...and-parliament
Definitely murky alright and if IRD says your "intent" was to trade for profit you have to prove you weren't.Int that some traders also get get turned down being reclassified as traders because of all the losses they can claim on. Go figure!!
Human nature everyone is an investor in land and shares when things are going up but it is surprising how stated intentions turn from investing to trading/speculation when a downturn hits and losses are made.
A comprehensive capital gains tax might sort this out better. Although I guess I need to understand how it works in practice as you would still be arguing over capital/revenue distinctions as they would involve different tax rates. Maybe John Key is right, too complicated. How about a two year brightline test for shares as well as property? If you are investing long term surely two years isn't long at all.