Tax on Capital Gains: Trading vs Buy-and-hold

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Originally Posted by tobo

Yep, any Aus company big enough to be paying dividends are typically exempt from FIF, but you still lose the franking (Aus tax dept steals it, in essence) and you got to pay NZ tax on the net smaller div amount after franking, so Aus co needs to be making 30% more than a NZ co.

Non-dividend Aus companies (juniors and the like), of which there are many, means gains are solely in SP appreciation. SP appreciation are capital gains (and there is no capital gains tax in NZ). And then you must pay 5% FIF tax on appreciation for that year. 5% on (effectively) entire earnings for FIF companies versus 30% on a dividend that has already been shaved by 30% Franking.

Of course FIF versus non-FIF businesses is not comparing apples with apples (more like apples with screwdrivers).

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I may have it wrong here but my understanding is that ASX listed company's are exempt from FIF tax regardless of whether they pay a dividend, are large or small cap etc. For other jurisdictions FIF only kicks in where initial investment exceeds $50K NZD.

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Originally Posted by tobo

Yep, any Aus company big enough to be paying dividends are typically exempt from FIF, but you still lose the franking (Aus tax dept steals it, in essence) and you got to pay NZ tax on the net smaller div amount after franking, so Aus co needs to be making 30% more than a NZ co.

Non-dividend Aus companies (juniors and the like), of which there are many, means gains are solely in SP appreciation. SP appreciation are capital gains (and there is no capital gains tax in NZ). And then you must pay 5% FIF tax on appreciation for that year. 5% on (effectively) entire earnings for FIF companies versus 30% on a dividend that has already been shaved by 30% Franking.

Of course FIF versus non-FIF businesses is not comparing apples with apples (more like apples with screwdrivers).

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I've simplified my situation (of using companies to trade/invest) & now have 2 a/c's with asb sec, one in my name & a margin lending a/c (nominee a/c).

This is more than enough distinction for IRD purposes

Have just been loking at the FIF rules via a 2007 IRD briefing paper and the following summary about ASX listed exemptions is given. Not sure what they are getting at here:

Investments in Australian-resident companies listed on an approved index
of the Australian Stock Exchange, such as the All Ordinaries index (the
500 largest listed companies), are exempt from the foreign investment
fund rules. The general income tax rules will continue to apply to these
Australian investments: that is, taxable only on dividends if the shares are
held on capital account and on dividends and realised share gains if the
shares are held on revenue account. However, investments in Australianresident listed companies held by portfolio investment entities are
generally taxable only on dividends.

Are the tax requirements on "revenue" account realised share gains mentioned above akin to the NZ process of paying tax if it was intended to sell for a profit at time of purchase - or is it pay tax on capital gains of Australian shares regardless of intent or reason e.g. compulsory takeover?

Any comments gratefully accepted.

I am planning to review all my structures with my accountant over the next week or so but am just interested in views/information prior to this i.e any comments accepted as all care and no responsibility.

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Originally Posted by impacman

Have just been loking at the FIF rules via a 2007 IRD briefing paper and the following summary about ASX listed exemptions is given. Not sure what they are getting at here:

Investments in Australian-resident companies listed on an approved index
of the Australian Stock Exchange, such as the All Ordinaries index (the
500 largest listed companies), are exempt from the foreign investment
fund rules. The general income tax rules will continue to apply to these
Australian investments: that is, taxable only on dividends if the shares are
held on capital account and on dividends and realised share gains if the
shares are held on revenue account. However, investments in Australianresident listed companies held by portfolio investment entities are
generally taxable only on dividends.

Are the tax requirements on "revenue" account realised share gains mentioned above akin to the NZ process of paying tax if it was intended to sell for a profit at time of purchase - or is it pay tax on capital gains of Australian shares regardless of intent or reason e.g. compulsory takeover?

Any comments gratefully accepted.

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Pretty much the same (just different terminology), & yeah all goes back to that very grey, murky area of "intent".

Again holding securities in two different a/c's is the easiest method to appease the IRD...

I've been doing it for years & never had a peep out of them :D

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Originally Posted by shasta

Pretty much the same (just different terminology), & yeah all goes back to that very grey, murky area of "intent".

Again holding securities in two different a/c's is the easiest method to appease the IRD...

I've been doing it for years & never had a peep out of them :D

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Thanks Shasta. Do the same myself but just had a moment of uncertainty. Pity nothing is black and white but thats the game. Will continue to do as I have been doing.:)

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Originally Posted by impacman

Thanks Shasta. Do the same myself but just had a moment of uncertainty. Pity nothing is black and white but thats the game. Will continue to do as I have been doing.:)

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I used to send in my spreadsheets, but they don't have the resources to fully audit them, & nor do they need to...

I dont bother now :D

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Hi Shasta,

Hope you have a moment to look at the following query.

If have two accounts, the first registered as a <Capital Acc>, and the second as a <Trading Acc>

If I then hold headshares of company X in my <Trading Acc> which then issues a set of free options in company X, I would then have two possibilities:

(a) exercise the options on or close two the expiry date (assuming they are in the money)

(b) At some point before expiry, sell the options for cash etc

In the case of (a) are there any tax implications simply due to the exercise process ?

In the case of (b) what will be the tax implications of the sale of the options ?

Finally, what would be the tax situation if the headshares and options were held in the <Capital Acc> ?

Your response to the above would be most appreciated.

Many thanks,

Zorba

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Originally Posted by zorba

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Hi Shasta,

Hope you have a moment to look at the following query.

If have two accounts, the first registered as a <Capital Acc>, and the second as a <Trading Acc>

If I then hold headshares of company X in my <Trading Acc> which then issues a set of free options in company X, I would then have two possibilities:

(a) exercise the options on or close two the expiry date (assuming they are in the money)

(b) At some point before expiry, sell the options for cash etc

In the case of (a) are there any tax implications simply due to the exercise process ?

In the case of (b) what will be the tax implications of the sale of the options ?

Finally, what would be the tax situation if the headshares and options were held in the <Capital Acc> ?

Your response to the above would be most appreciated.

Many thanks,

Zorba

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Hi Zorba

If you held the shares in your trading a/c & received the free options, i would assume they become part of your trading portfolio & subject to tax on any gains...

If you held the shares in your capital a/c & later on sell the options, i would say these would be fine, as long as you don't trade the same securities or buy back what you sell, that muddies the waters somewhat.

Remember as an individual you have the benefit of accounting for transactions on a "cash basis", which means the options you received for free in your capital a/c are not required to be "valued" therefore if you allow them to lapse there is no tax benefit, but i assume thats far from your thinking!

Trading v investing is still a grey area which ultimately comes down to "intent".

I'm not trading anymore, but happily disclosed to the IRD when i was.

It doesn't pay to get clever,you will get found out & the statute of limitations does not apply if you have actively avoided paying tax!

Hope that clarifies your question?

Just a query, as I've only just started out and haven't actually lost anything yet, but can you claim losses with the IRD and if so, can you claim historical losses (ie last year or the year before)??

A similar situation to the above. I have a small loss from Forex trading, plus a few expenses related to setting up, 2nd hand computer, membership fess etc... for the 2010. Has anyone returned a forex loss before, and what is the likely IRD reaction?

Also I have been studying taxation as part of my diploma, and have come across the very grey area of share trading in relation to assessable income. Does anyone have any experience or know just what level of activity the IRD goes from it being 'not business' to being 'business'. Obviously buying and selling one or two shares a year won't interest them, but what about 10, or 20? Bearing in mind that I am talking from the viewpoint of a person who works full-time and does a bit of share-trading in their spare time. I know that if a persons full-time activity is share-trading then it is a business - it is when a persons full time income activity is something else (Say a Job) that things get tricky.

Cheers
Razor