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

Hi There,

Vince has kindly opened up this new area for newbie intro's and questions.

I'm Stuart from Auckland. I have considered property investment for the last couple of years, but the figures never added up, so I found my way here. ;)

My question tonight is about tax on capital gains.

In property, some people use trust structures to separate their property trading activities from their buy-and-hold activities, with the goal of minimising their tax on capital gains.

Is share trading similar?

Can a share trader also have a buy-and-hold portfolio which is not subject to tax on capital gains? If so, what structures do you recommend to separate trading activities from buy and hold activities?

Regards
Stuart

Hi Stuart,

Your accountant will be able to shed more light on this for you but the way it was explaned to me was similar to property.

Buy and Hold. Similar to property, if you brought with the INTENTION of holding long term to receive dividends then the capital gains will not be taxable.

Trading. Also similar to property, if you brought with the INTENTION of selling for a profit in a short space of time then the capital gains will be taxable.

It is your intention when you purchase that is tricky bit. Just remember with the IRD you are basically guilty and have to prove your innocence to them.

The way I do things which the accountant seems happy with is a buy and hold portfolio that I receive dividends from, I keep these shares under my own name.

For my trading I use a limited liability company (which can also be owned by your trust if you like), the gains on this are taxable, however you are also able to write of your expenses (computer, internet connection, home office expenses etc etc)

This method keeps everything separated and easy but i'm sure there are other ways as well.

Happy trading

Capybara

Thanks for your post. I have a limited liability company, so it makes good sense to use that for future trading activities - I will discuss it with my accountant of course, but your comments have been valuable!

funguspudding

Thanks to you also. Nothing wrong with being pedantic as far as I am concerned. It actually helps clarify the situation.

Regards
Stuart

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Originally Posted by Cadmium

Hi There,

Vince has kindly opened up this new area for newbie intro's and questions.

I'm Stuart from Auckland. I have considered property investment for the last couple of years, but the figures never added up, so I found my way here. ;)

My question tonight is about tax on capital gains.

In property, some people use trust structures to separate their property trading activities from their buy-and-hold activities, with the goal of minimising their tax on capital gains.

Is share trading similar?

Can a share trader also have a buy-and-hold portfolio which is not subject to tax on capital gains? If so, what structures do you recommend to separate trading activities from buy and hold activities?

Regards
Stuart

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Cadmium

Welcome to Sharetrader :)

A company structure is useful for trading, but not without pitfalls!

You can claim expenses against your "trading" as an individual, so make sure you fully understand a company structure BEFORE starting out.

A company does "ring fence" a maximum tax rate of 30%, but you have to get the profits out, & thats where it can get tricky...

Questions to consider:

1. Have you elected to become a "Qualifying Company"?

2. If so, have you elected to become a "Loss Attributing Qualifying Company"?

3. Do you know the difference between the two?

http://www.ird.govt.nz/resources/fil...8a03/ir435.pdf

Here's the IRD booklet to help you start.

4. Are you familiar with the "FDR" rules - Fair Dividend Regime?

http://www.kensingtonswan.com/Public...xation/PIE.pdf

5. Are you familiar with the "FIF" rules - Foreign Investment Funds?

http://www.ird.govt.nz/toii/fif/

One of the biggest differences between an individual & a company for trading, is the loss of the "cash basis method" for non individuals.

That means an individual only has to include "realized" profits & losses, ie "cash basis" when investments are sold.

A non individual (Company, Trust etc) must account for transactions on a "accrual basis" that means "unrealized gains & losses" must be included.

If you have other questions, post them here & i'll try & help you.

Or send me a private message if you don't want to post things in public.

I'm a contract financial accountant, ex PriceWaterhouseCoopers, and i'm a share trader myself ;)

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Cadmium

Welcome to Sharetrader :)

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Thanks shasta!

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1. Have you elected to become a "Qualifying Company"?

2. If so, have you elected to become a "Loss Attributing Qualifying Company"?

3. Do you know the difference between the two?

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My answers are 1. "No", 2. "No" and 3."I understand the key advantage of LAQC's but I know less about this than I should". I trade under this company as an IT consultant. I am the only shareholder and I simply draw wages from it.

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4. Are you familiar with the "FDR" rules - Fair Dividend Regime?

5. Are you familiar with the "FIF" rules - Foreign Investment Funds?

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Thanks for those links. I am not thinking beyond the NZX and ASX at this stage. From what I understand from the IRD link, it appears most ASX company income is exempt from the FIF rules (i.e. treated the same as income from NZ shares).

This has been very useful information!

Regards
Cadmium

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Originally Posted by Cadmium

...most ASX company income is exempt from the FIF rules (i.e. treated the same as income from NZ shares).

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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).

There was discussion above about pros and cons of using a company for one of these. Costs to setup & run a company, and loss of 'cash basis', is enough for me to not set up a company to make the separation.

I was thinking to simply have two share trading accounts (perhaps with two different brokers or perhaps with the same broker). One called 'Joe Bloggs', the other 'Joe Bloggs Trading'.

Here's my question.
If I set up 2nd trading account with same broker (in my case ASB Securities), should I (or can I) have only one CSN & FIN (for NZ) and one HIN (for Aus) applicable to both accounts.

This would be enough to show distinction for IRD and would be less share registry paperwork & complication. It would mean I could have an investment in a company and then buy some shares in that same company to trade, and they would all be combined in the share registry summaries. I would have to keep track of how many are applicable to the trading (which would be easy because I'd have separate portfoilio records)

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Originally Posted by Cadmium

Hi There,

Vince has kindly opened up this new area for newbie intro's and questions.

I'm Stuart from Auckland. I have considered property investment for the last couple of years, but the figures never added up, so I found my way here. ;)

My question tonight is about tax on capital gains.

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It's worth noting that there is no capital gains in NZ on anything. Certain activities however will incur income tax, assessed on the profit made on selling. If what you are doing is providing your bread and butter, or daily living, then that activity is taxable. If you make a profit on the sale of a long held asset, and don't make a habit of doing that, then it is almost certainly not going to be taxable. There are all sorts of grey areas in between mostly depending on your intention at the time of purchase.

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Originally Posted by tobo

There was discussion above about pros and cons of using a company for one of these. Costs to setup & run a company, and loss of 'cash basis', is enough for me to not set up a company to make the separation.

I was thinking to simply have two share trading accounts (perhaps with two different brokers or perhaps with the same broker). One called 'Joe Bloggs', the other 'Joe Bloggs Trading'.

Here's my question.
If I set up 2nd trading account with same broker (in my case ASB Securities), should I (or can I) have only one CSN & FIN (for NZ) and one HIN (for Aus) applicable to both accounts.

This would be enough to show distinction for IRD and would be less share registry paperwork & complication. It would mean I could have an investment in a company and then buy some shares in that same company to trade, and they would all be combined in the share registry summaries. I would have to keep track of how many are applicable to the trading (which would be easy because I'd have separate portfoilio records)

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My amterish opinion would be to operate as two entities in some form.
Trying to convince the IRD that "XYZ Ltd was my long term portfoio I sold because......"
Not going to work.
I use to operate this way until I moved my long term holdings into a trust and with a different broker.

I think most on here would agree (I hope!) :o

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Originally Posted by Jay

My amterish opinion would be to operate as two entities in some form.
Trying to convince the IRD that "XYZ Ltd was my long term portfoio I sold because......"
Not going to work.
I use to operate this way until I moved my long term holdings into a trust and with a different broker.

I think most on here would agree (I hope!) :o

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I'm not sure that I agree. The IRD take each case on merit, but overall they look for a pattern. I doubt that using a separate entity would make much difference unless the shareholding differs. I do know some who have done what you suggest and got away with any tax on long holdings, but I don't think you can guarantee it. Good luck.