Am I liable for paying tax

Hi all. I've just started investing in the NZX share market. My $15K first investment (AIR.NZ) was in March when the market was low. Then I gradually have more funds (around $300K so far) to invest (due to mature of term deposits, notice savers, etc.). As a beginner, I am learning and have bought 9 different company shares and sold 3 of them so far while I was trying to find good shares for long term investment. For one of them, I sold them only 1 week after the purchase. Of course I still keep a few shares which I consider they are good for long term. So the whole process is just learning, trying and diversifying. For those 3 shares I "traded", I did have some gain (about $5K). However the reasons why I sold them are just because I found I have other better shares for long term investment and those shares are turned out not meeting my objective after I spend more time studying on them after the purchase. At the time I bought them, I did have an intention to hold them for long time. I still keep the good shares such as AIR.

My question is do I need to pay capital tax for the gain? If I continue this process (optimizing investment portfolios) for a while and gain from "trading", do I have to pay tax? Thank you.

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Originally Posted by jhf

Hi all. I've just started investing in the NZX share market. My $15K first investment (AIR.NZ) was in March when the market was low. Then I gradually have more funds (around $300K so far) to invest (due to mature of term deposits, notice savers, etc.). As a beginner, I am learning and have bought 9 different company shares and sold 3 of them so far while I was trying to find good shares for long term investment. For one of them, I sold them only 1 week after the purchase. Of course I still keep a few shares which I consider they are good for long term. So the whole process is just learning, trying and diversifying. For those 3 shares I "traded", I did have some gain (about $5K). However the reasons why I sold them are just because I found I have other better shares for long term investment and those shares are turned out not meeting my objective after I spend more time studying on them after the purchase. At the time I bought them, I did have an intention to hold them for long time. I still keep the good shares such as AIR.

My question is do I need to pay capital tax for the gain? If I continue this process (optimizing investment portfolios) for a while and gain from "trading", do I have to pay tax? Thank you.

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Go and see an accountant , do not take advice from an Internet forum .
Good luck out there , careful , good shares can go bad quickly in this environment .

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Originally Posted by jhf

Hi all. I've just started investing in the NZX share market. My $15K first investment (AIR.NZ) was in March when the market was low. Then I gradually have more funds (around $300K so far) to invest (due to mature of term deposits, notice savers, etc.). As a beginner, I am learning and have bought 9 different company shares and sold 3 of them so far while I was trying to find good shares for long term investment. For one of them, I sold them only 1 week after the purchase. Of course I still keep a few shares which I consider they are good for long term. So the whole process is just learning, trying and diversifying. For those 3 shares I "traded", I did have some gain (about $5K). However the reasons why I sold them are just because I found I have other better shares for long term investment and those shares are turned out not meeting my objective after I spend more time studying on them after the purchase. At the time I bought them, I did have an intention to hold them for long time. I still keep the good shares such as AIR.

My question is do I need to pay capital tax for the gain? If I continue this process (optimizing investment portfolios) for a while and gain from "trading", do I have to pay tax? Thank you.

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As a precaution you should keep a dated and detailed 'investment diary' where you clearly state on what day you intend to start your long term investment plan and what your long term investment objectives are. 'Trading' to achieve these objectives is generally not a taxable activity. The bits in your post I have emboldened are the important statements that mean you are not a trader for income tax purposes. The tax treatment of any share 'trade' depends on the intent you had when you bought it.

SNOOPY



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Originally Posted by stoploss

Go and see an accountant , do not take advice from an Internet forum .
Good luck out there , careful , good shares can go bad quickly in this environment .

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Thank you. One accoutant I've talked to considered gaining in such a volatile market through optimising portfolio of about $300K with long investment intention should be waived from taxable income. However he is not that certain as this case is new to him. Therefore I came to this forum to get experienced investor's advice.

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Originally Posted by Snoopy

As a precaution you should keep a dated and detailed 'investment diary' where you clearly state on what day you intend to start your long term investment plan and what your long term investment objectives are. 'Trading' to achieve these objectives is generally not a taxable activity. The bits in your post I have emboldened are the important statements that mean you are not a trader for income tax purposes. The tax treatment of any share 'trade' depends on the intent you had when you bought it.

SNOOPY



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Thank you SNOOPY. I think having such a diary is a good idea. However, shall I report my gain to IRD along with the diary in the tax return? Will IRD accept such a diary to recognize my intention? What is the optimal practice in dealing with IRD? Cheers.

Some older threads that may help too http://www.sharetrader.co.nz/showthr...t=Tax+on+
http://www.sharetrader.co.nz/showthr...t=Tax+on+share


NZ Tax on Share Trading

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Originally Posted by jhf

Thank you SNOOPY. I think having such a diary is a good idea. However, shall I report my gain to IRD along with the diary in the tax return? Will IRD accept such a diary to recognize my intention? What is the optimal practice in dealing with IRD? Cheers.

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Just keep your diary at home. Report only your dividend income to the IRD. If the IRD contacts you for clarification, THEN you can produce your diary as evidence of your behaviour. Why would the IRD contact you?

1/ If you buy shares that don't pay a dividend, then the IRD could argue that the only way you can profit from such an investment is to sell your shares. Thus the IRD could argue that you must have bought the shares to sell at a profit and therefore your capital profit should be treated as part of your income. However, there are alternative ways of looking at such a transaction. The dividend may have been suspended because of a difficult business market and you could argue that you have bought in, in anticipation of the dividend being restored.

2/ Another scenario is that you have bought into a new and growing company that is expecting positive cashflow, that you then expect will turn into a dividend in the future. Of course, if you have a record of trading in and out of such a share then you may have problems because that behaviour would be contrary to your written intent.

In summary, if you have a pre-written record of intent and do not engage in behaviour that is very obviously trading (I notice for the first time this year that Computershare sent me an end of year statement of my capital position, together with any changes - you would have to assume that this information is also accessible to the IRD) then you should not have any problem just declaring your income. You have to accept the other edge of the double edged sword if you do that though. If you are not a trader, you can't claim any capital losses against your income.

SNOOPY

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Originally Posted by Snoopy

You have to accept the other edge of the double edged sword if you do that though. If you are not a trader, you can't claim any capital losses against your income.

SNOOPY

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Snoopy you make some very good points. As to the point I have highlighted, you would really hope that in the long run you have a capital gain otherwise something has really gone horribly wrong. (as an investor not a trader)

Thank SNOOPY and other guys providing the advice.

SNOOPY, is your diary a physical traditional paper based diary?

I made an excel table with all of my transactions and then added the reasons for each transaction under the column of "Reasons for investment". The reasons might be like:
1. AIR has a good dividend history. Current Dividend Yield:12.2% (as calculated at directbroking.co.nz, 11 cents / 90 cents)
2. I'm a ANZ customer. Add ANZ to diversify bank shares. Good dividend history. Current divident yield: 5.2%.
3. buy MET on 2 June: came across news about MET's lost its case with APVG regarding the acquisition. Retirement village and eldly care business are definitely good long term investment as the population is aging.
4. sell MET on 10 June: "Shareholder Meeting called to Vote on Litigation" announced 8 Jun. Seems the management is more interested in selling the company at premium instead of focusing on improving operations. The potential legal action might incur lots of fees and time. In contrast Ryman is bigger than MET and has no such issue.
5. Buy RYM on the same day when selling MET: better long term investment in retirement village and care industry (than MET). Bigger company, bigger development pipelines, no complex, costly and long legal dispute issue. Refer to "KordaMentha Independent Advisers Report" (http://nzx-prod-s7fsd7f98s.s3-websit...271/323998.pdf).

Then I sent the excel table to my own email box (in this way, a time stamp can be there for future verification). Do you think this is already a good approach? Cheers.

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Originally Posted by jhf

Thank SNOOPY and other guys providing the advice.

SNOOPY, is your diary a physical traditional paper based diary?

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Personally I rely on my IR3s that I have filed with the IRD over the last seven years to tell the story. I am relying on the fact that my declared dividends are from the same companies each year. So I think it is obvious to anyone who looks at my dividend record that I haven't been trading in and out of things. I personally have never done any share trading. Basically my investment strategy is to accumulate good dividend paying shares during periods of specific company stress (so that i can buy them cheaply). If a company doesn't pay a dividend, or shows no sign that it is going to do so, then I don't buy it. Simple as that.

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Originally Posted by jhf

I made an excel table with all of my transactions and then added the reasons for each transaction under the column of "Reasons for investment". The reasons might be like:
1. AIR has a good dividend history. Current Dividend Yield:12.2% (as calculated at directbroking.co.nz, 11 cents / 90 cents)
2. I'm a ANZ customer. Add ANZ to diversify bank shares. Good dividend history. Current divident yield: 5.2%.
3. buy MET on 2 June: came across news about MET's lost its case with APVG regarding the acquisition. Retirement village and eldly care business are definitely good long term investment as the population is aging.
4. sell MET on 10 June: "Shareholder Meeting called to Vote on Litigation" announced 8 Jun. Seems the management is more interested in selling the company at premium instead of focusing on improving operations. The potential legal action might incur lots of fees and time. In contrast Ryman is bigger than MET and has no such issue.
5. Buy RYM on the same day when selling MET: better long term investment in retirement village and care industry (than MET). Bigger company, bigger development pipelines, no complex, costly and long legal dispute issue. Refer to "KordaMentha Independent Advisers Report" (http://nzx-prod-s7fsd7f98s.s3-websit...271/323998.pdf).

Then I sent the excel table to my own email box (in this way, a time stamp can be there for future verification). Do you think this is already a good approach? Cheers.

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Sounds really good jhf. I think I might hire you to write an investment diary for myself!

SNOOPY

Quote:

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Originally Posted by jhf

Thank SNOOPY and other guys providing the advice.

SNOOPY, is your diary a physical traditional paper based diary?

I made an excel table with all of my transactions and then added the reasons for each transaction under the column of "Reasons for investment". The reasons might be like:
1. AIR has a good dividend history. Current Dividend Yield:12.2% (as calculated at directbroking.co.nz, 11 cents / 90 cents)
2. I'm a ANZ customer. Add ANZ to diversify bank shares. Good dividend history. Current divident yield: 5.2%.
3. buy MET on 2 June: came across news about MET's lost its case with APVG regarding the acquisition. Retirement village and eldly care business are definitely good long term investment as the population is aging.
4. sell MET on 10 June: "Shareholder Meeting called to Vote on Litigation" announced 8 Jun. Seems the management is more interested in selling the company at premium instead of focusing on improving operations. The potential legal action might incur lots of fees and time. In contrast Ryman is bigger than MET and has no such issue.
5. Buy RYM on the same day when selling MET: better long term investment in retirement village and care industry (than MET). Bigger company, bigger development pipelines, no complex, costly and long legal dispute issue. Refer to "KordaMentha Independent Advisers Report" (http://nzx-prod-s7fsd7f98s.s3-websit...271/323998.pdf).

Then I sent the excel table to my own email box (in this way, a time stamp can be there for future verification). Do you think this is already a good approach? Cheers.

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You're making reason's up. Having experience with tax auditors, the 'intention' means very little when the 'facts speak for themselves'. That is you bought at this date, and sold it within a week or 2 later. If your portfolio has a 'history' of frequent trading, then the whole account would deemed as a trading account and not as a savings for retirement account. What I mean is, to say 1 or 2 particular transactions that show a clear profit was not the intent for profiting... does not speak for the rest of the account if similar behaviour is shown in other trades with different shares.

This kind of behaviour is why the NZ gov't brought in the 'bright line' test for residential property flipping (raised from 2 years to now 5 years). It would be very hard to explain to the tax auditor if you've been in and out on a particular stock within a much shorter period like 1 or 2 months. Again, it's all about the 'frequency' of selling for a profit. If you had a portfolio and kept buying every month or so and did this for like 5 or 10 years, then this is a clear example of not trying to profit.

IMO, if you want to establish an account to be tax free from capital gains, you must demonstrate it by not frequently buying and selling; surely not within 2 or 3 weeks or months because the market was favourable at the time to profit.

I'm quite certain if you asked your accountant or IRD, they would say the same thing.

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Originally Posted by SBQ

You're making reason's up. Having experience with tax auditors, the 'intention' means very little when the 'facts speak for themselves'. That is you bought at this date, and sold it within a week or 2 later. If your portfolio has a 'history' of frequent trading, then the whole account would deemed as a trading account and not as a savings for retirement account. What I mean is, to say 1 or 2 particular transactions that show a clear profit was not the intent for profiting... does not speak for the rest of the account if similar behaviour is shown in other trades with different shares.

This kind of behaviour is why the NZ gov't brought in the 'bright line' test for residential property flipping (raised from 2 years to now 5 years). It would be very hard to explain to the tax auditor if you've been in and out on a particular stock within a much shorter period like 1 or 2 months. Again, it's all about the 'frequency' of selling for a profit. If you had a portfolio and kept buying every month or so and did this for like 5 or 10 years, then this is a clear example of not trying to profit.

IMO, if you want to establish an account to be tax free from capital gains, you must demonstrate it by not frequently buying and selling; surely not within 2 or 3 weeks or months because the market was favourable at the time to profit.

I'm quite certain if you asked your accountant or IRD, they would say the same thing.

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There is no 'bright line' test for shares though. And the reason for that is that sometimes it is legitimate to rebalance a portfolio more frequently than every two years. Just because you buy and sell something within a couple of months does not mean you are a trader. If you have a pattern of buying and selling frequently then that is another matter.

SNOOPY

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Originally Posted by Snoopy

There is no 'bright line' test for shares though. And the reason for that is that sometimes it is legitimate to rebalance a portfolio more frequently than every two years. Just because you buy and sell something within a couple of months does not mean you are a trader. If you have a pattern of buying and selling frequently then that is another matter.

SNOOPY

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I wish it were true. If so, we need an explanation for all the NZ managed funds that do frequent rebalancing of their portfolios and WHY those funds and or their clients (whom the majority being under the Kiwi Saver scheme) are subjected to paying taxes under the PIR?

Clearly, if the NZ individual were to just buy a NZ listed share, sit on it for 10 years without selling, then there's the clear advantage of paying no tax than to be under a KS scheme. However this is not the case with the OP person asking.

I would believe it's very hard to convince IRD that doing frequent portfolio re-balancing (and if it could be done in an effective indiscriminate way?) would prove no profiting has taken place. Even with a bright line test with residential properties, if I had a 30 year habit of buying houses every 5 or 10 years, and then selling them every 5 years (under FIFO), IRD would still go at the capital gains as, this would demonstrate a pattern for profiting. Look at it from the other end of the scenario ; how likely are people wanting to sell their assets at a loss vs 'oh prices have gone up so fast in a short time and I want to sell' ? The process in place to buy and sell a house is very complex and a lot of disclosure & paper work is required. One simply can't say I sold my 3rd rental home in Auckland, and then use the proceeds to buy 2 or 3 houses in Palmerston North (because of some farming boom occurred there and houses were set to rise faster... and hence, the argument being 'I was only re-balancing my real estate portfolio around).