Income tax on trading

Tax question related to selling equities.

Here goes. Elderly relative has a significant Australian equity position. I have to deal with all her paperwork as she has more or less gone blind. I'll also be her executor. (Groan). She has a problem in that apart from writing a cheque out, she can't access her Australian bank account (AML rules etc etc). THIS IS NOT THE ISSUE. We've moved beyond this. But I'm painting a picture.

I've been talking to the bank (as power of attorney) and other parties and have come up with a solution that solves bigger picture issues. The stumbling block for this bigger picture solution is tax on the sale of equities.

So, the solution to all the problems (and there are many more problems than listed above) is to sell the entire shebang in Australian and repatriate the money here. She would sell through a NZ share trading service, probably ASB. The money will go into her NZ account. We will then either write a cheque out to deposit her entire Australian savings into her NZ account.(Another option is something like TransferWise, but moving the money over here is not hte question). Once this is all done there is no money in Australia and no worry about Aussie probate, which is costly from here and a pain in the diggeries.

Just FYI to finish painting the picture, she will then buy a Pie investment here. Hopefully a diversified fund, but she may demand to put the money into Aussie equities and if she does then it will be an Australian Equity Pie of some sort.

Now to the point of this post and the question. If she sells the shares is she subject to tax on the gains in NZ? I'd like to pay to get an opinion from a tax accountant. But she refuses. She says if they give her the wrong advice then she's still liable. (But personally I think that a tax accountants advice will be way better than my research and if nothing a second opinion.) I have looked through everything below. She has gradually bought the Aussie portfolio over 40 years and has been retired for 33 years, living off the dividends. If she has excess dividends she buys rights issues etc. She has only sold a handful of holdings in that 40 years. Mostly when she gets an offer through the mail (not the dodgy ones). So she definitely bought to build up income for retirement. As far as I can see she wouldn't be hit with tax on the gains. But I'd be keen to hear ideas from seasoned investors on here.

Before someone points out that I have power of attorney. She still has her marbles, although she's a bit stuck in the past. I won't use the power of attorney to do anything that's she's not 100% in agreement with. It looks like she agrees with my solution (but she, I and other relatives are all thinking it over for a few weeks first). My big issue is the fear that she could be hit with tax on the gains from the IRD. She is tax resident in NZ, so the Aussie CGT isn't a worry in her lifetime.

FYI, there is a lot more detail and I'm happy to answer questions. Also re the info from Sharesight below, i've been through that list and none of those apply to her. She bought to provide an income in her retirement.


From Sharesight:
When are gains made on shares taxed in NZ?

Unfortunately New Zealand’s IRD provides very little information to investors on when the latter is ruled to apply.
Per Section 65 of the 2007 Income Tax Act, a gain is liable for income tax when:

• The investor is in the business of dealing in shares, or
  
• The shares were acquired with the dominant purpose of resale at a profit, or
  
• The investor enters into a scheme or undertaking to make a profit from shares

In simpler terms:

1. The intent when purchasing the shares needs to be to make a gain when sold
   
2. This needs to be the dominant purpose for the buying of these shares (rather than earning dividend income for example)

NZ may tax gains on shares when:

The IRD looks for a number of behaviours in determining whether the investor is undertaking a business in dealing (or trading) in shares:

• Individuals show a pattern of (usually frequent) buying and selling of shares over time
  
• Individuals invest significant levels of capital in investments, in particular when investing on margin / borrowing to invest
  
• Individuals monitor their investment portfolios closely, perhaps using an advanced online trading platform
  
• Individuals spend a lot of time researching their investments
  
• Individuals buy high risk shares to flip at a profit
  
• Shares are bought and sold on ‘revenue’ account instead of capital account

I am fairly confident that the no tax would be payable on the capital gains.

Where... oh yeah nah got it...

Based on the facts you have provided there doesn't appear to be any reason why the IRD would look at taking the capital gain on sale.

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Originally Posted by unhuman

Based on the facts you have provided there doesn't appear to be any reason why the IRD would look at taking the capital gain on sale.

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Thanks unhuman (and the other two). I don't think I've left out any relevant facts. But if you think there is something that could change this position please ask me and I'll endeavour to answer. As you can probably see I've been giving this a lot of thought. But I'm not a tax person and I don't know what I don't know. Thanks in advance.

As someone who pays substantial tax on any trading profits I wouldn't even consider that liability if I was in her situation simply because of her lack of activity and time of holding, quite simply she is not a trader as classified by IRD.

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Originally Posted by Interested_Party

Thanks unhuman (and the other two). I don't think I've left out any relevant facts. But if you think there is something that could change this position please ask me and I'll endeavour to answer. As you can probably see I've been giving this a lot of thought. But I'm not a tax person and I don't know what I don't know. Thanks in advance.

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No I don't think so. The issue is determining the intent on purchase of the shares (bearing in mind that I believe the onus of proof would be on yourselves if the IRD challenged the sales).

The evidence of intent seems to be very clear based on what you have outlined.

The fact that she has been retired for 33 yrs living off the dividends is proof enough that her intent was for passive income not profit.

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Originally Posted by Interested_Party

Thanks unhuman (and the other two). I don't think I've left out any relevant facts. But if you think there is something that could change this position please ask me and I'll endeavour to answer. As you can probably see I've been giving this a lot of thought. But I'm not a tax person and I don't know what I don't know. Thanks in advance.

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We need to question residency as both Australia and NZ base taxation on a world wide basis. You say she is NZ resident, but is she also an Autralian resident (or has been in the past?) ; I ask because you mentioned she has a "Australian Bank Account" and the lack of having direct access to it from NZ? may mean her Australian equities are held abroad in Australia? By ASB broker there?

1) While she may of owned the Australian equities from a lengthy amount of time, it's clear there was no intent for profiting / speculation from the NZ tax perspective. However, you can be sure the Australian ASB bank end will report to the Aus tax dept upon sale of the equities and if the investment account / portfolio is registered in Australia with an Aus tax #, then there will be a tax obligation to pay at the Australian end. If the account was registered as a non-resident account with no tax # held, then there should be no concern at the Australian end.

2) At the NZ end, if she has been a NZ resident for the 40 years ; the purchase of those assets would not fall into NZ taxation for the bulk of the years invested. However, they should / could of been subjected to NZ's FIF (Foreign Investment Fund) tax rules. There's a web link (perhaps on IRD) that shows which Australian equities are listed as exempt from FIF (but not all). If they're exempt, then there's no issue of capital gains tax at the NZ end nor FIF.

FIF was introduced in 2007 so well over 10 years and if the equities are not listed as being exempted from FIF, then she should be filing annual tax returns to IRD on those assets (any gains have a tax max of 5% if the FDR is used). How long did she live in NZ or become a NZ resident?

3) Assuming she was an Australian resident in the past, i'm certain Australia has deemed disposition rules upon leaving (becoming non-resident) Australia. This means capital gains tax to be paid on the investments (does not have to be sold) based on the date when she departed Australia. Upon becoming resident in NZ, if she arrived during the time FIF had been implemented, then her broker/account portfolio should be assessed under FIF (if the shares are not exempted from FIF).

A lot has happened in the past year regarding AML and more specifically, CRS (common reporting standard). No more are banks in the some 110+ countries (mostly OECD nations) around the world can have bank secrecy like they use to and in order to comply, they must forward tax information to the resident country. If you're wondering how CRS came about, you can blame the Panama papers and the media on it ; also the US was the 1st nation to impose such an act globally called FACTA on US citizens living abroad.

From my tax knowledge back in Canada, it is very hard to tell the tax dept that you're buying shares WITHOUT the intent for a profit. The meaning is 'investment income' by all means, if there's a gain on the sale of the share will always attract a tax to pay because the intent is clear... no one buys shares without the intent not to profit. This is treated very different to buying a principal resident home which a person uses and dwells in and any capital gain upon the sale is genearlly.. tax free. Houses are a necessity but owning investments... particularly share ownership, is treated in a way like business income in a partnership of a small business; at least from the Cdn perspective.

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Originally Posted by SBQ

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Thanks for the questions.

Re residency. She lived in Australia for 18 months in approximately 1960/61. She didn't start buying the relevant equities until the late 70s early 80s. Note she was born in NZ. She lived in the UK for a couple of years in the late 1950s, then the 18 months in Oz, and back in New Zealand for the past 57 years.

Re where the equities are held. She bought them through a New Zealand broker in New Zealand. So I'm pretty sure that means they're held here.

Re the bank. Westpac is her Australian bank. Opened at some point decades ago before AML. But opened from NZ when that was easy. The reason for opening was to receive her Australian dividends. Her postal address for that bank account has always been NZ. ASB is a New Zealand bank.

Re FIF. I can't seen the connection of FIF to the question of taxation on trading profits (and the question here is whether she is trading). But in terms of FIF I just need to say the word and her pacemaker nearly explodes. She divested herself of the one FIF holding she had as soon as the FIF tax was brought in. So no FIF holdings. ButI still can't see any connection with the issue of tax on trading profits.

Australian residency. Even if she was a resident in 1960/61, she wasn't a resident when these shares were bought. She owned no equities when she departed Australia.

AML/CRS was the problem that set off this entire enquiry. However we're not worried about AML. Just the spectre of tax on trading profits.

Re intent. The question out her intent when buying is only one of the tests the IRD exercises. There are others that were set out in my original post. The questions relate not to CGT but to income tax when traders are living off the capital gain. So the capital gain is their income. She hasn't traded. Ever. She has never bought to trade so I'm fairly confident she could not be classed as a trader. She bought the equities to provide an income in her old age, which is exactly what they have provided for the past 33 years.

Any thoughts gratefully received.

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Originally Posted by Interested_Party

Thanks for the questions.

Re residency. She lived in Australia for 18 months in approximately 1960/61. She didn't start buying the relevant equities until the late 70s early 80s. Note she was born in NZ. She lived in the UK for a couple of years in the late 1950s, then the 18 months in Oz, and back in New Zealand for the past 57 years.

Re where the equities are held. She bought them through a New Zealand broker in New Zealand. So I'm pretty sure that means they're held here.

Re the bank. Westpac is her Australian bank. Opened at some point decades ago before AML. But opened from NZ when that was easy. The reason for opening was to receive her Australian dividends. Her postal address for that bank account has always been NZ. ASB is a New Zealand bank.

Re FIF. I can't seen the connection of FIF to the question of taxation on trading profits (and the question here is whether she is trading). But in terms of FIF I just need to say the word and her pacemaker nearly explodes. She divested herself of the one FIF holding she had as soon as the FIF tax was brought in. So no FIF holdings. ButI still can't see any connection with the issue of tax on trading profits.

Australian residency. Even if she was a resident in 1960/61, she wasn't a resident when these shares were bought. She owned no equities when she departed Australia.

AML/CRS was the problem that set off this entire enquiry. However we're not worried about AML. Just the spectre of tax on trading profits.

Re intent. The question out her intent when buying is only one of the tests the IRD exercises. There are others that were set out in my original post. The questions relate not to CGT but to income tax when traders are living off the capital gain. So the capital gain is their income. She hasn't traded. Ever. She has never bought to trade so I'm fairly confident she could not be classed as a trader. She bought the equities to provide an income in her old age, which is exactly what they have provided for the past 33 years.

Any thoughts gratefully received.

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Very simply, go and see a good tax accountant.

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Originally Posted by blackcap

Very simply, go and see a good tax accountant.

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Sadly she refuses. What's more she won't believe the advice. She is always convinced she knows more than the experts.
We could spend our money and do it.

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Originally Posted by Interested_Party

Sadly she refuses. What's more she won't believe the advice. She is always convinced she knows more than the experts.
We could spend our money and do it.

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If all else fails, I would say that from a purely NZ perspective there is no capital gain tax to be made on the sale of the businesses that she has invested in for a long time.

However tax residency issues may arise and that is where I would go and get some advice from a tax expert.

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Originally Posted by couta1

The fact that she has been retired for 33 yrs living off the dividends is proof enough that her intent was for passive income not profit.

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Just repeating this post, this lady is NOT a trader under NZ tax law period, only a tax expert out to make extra bucks would say otherwise.

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Originally Posted by couta1

Just repeating this post, this lady is NOT a trader under NZ tax law period, only a tax expert out to make extra bucks would say otherwise.

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The only distinction of a portfolio trading account is to tax the gains at straight income rates. We know this is not the case but we also don't know about FIF. Under FIF the account does not have to be a speculative trading account on foreign shares. It's a straight out tax on paper gains regardless if the account has had zero or repeated trading activity.

Every share in the portfolio needs to be looked at if they're 100% FIF exempted. Some companies go in and out of FIF eligibility in certain years ; just like NZ shares that have an imputed dividend tax credit changes year after year to the shareholders.

If all ticks clear, then there's no sense to see a tax specialist. She needs to work out estate planning like I have with my father. I find it odd how she would choose to go into NZ PIE funds with the sale of these shares because if it's a significant sum of $, there are many better, more tax friendly, places around the world to move to. Even Australia would be a better bet for her to reside in because the PIE funds are taxed under FIF approach if they invest abroad. To invest solely in NZ equities is a huge risk when if she lived in Australia, she would be open to investments globally with no tax discrimination and only a capital gain tax (which only half of the gain is income taxable) and up to her when she chooses to elect the sale for the capital gain.

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Originally Posted by SBQ

The only distinction of a portfolio trading account is to tax the gains at straight income rates. We know this is not the case but we also don't know about FIF. Under FIF the account does not have to be a speculative trading account on foreign shares. It's a straight out tax on paper gains regardless if the account has had zero or repeated trading activity.

Every share in the portfolio needs to be looked at if they're 100% FIF exempted. Some companies go in and out of FIF eligibility in certain years ; just like NZ shares that have an imputed dividend tax credit changes year after year to the shareholders.

If all ticks clear, then there's no sense to see a tax specialist. She needs to work out estate planning like I have with my father. I find it odd how she would choose to go into NZ PIE funds with the sale of these shares because if it's a significant sum of $, there are many better, more tax friendly, places around the world to move to. Even Australia would be a better bet for her to reside in because the PIE funds are taxed under FIF approach if they invest abroad. To invest solely in NZ equities is a huge risk when if she lived in Australia, she would be open to investments globally with no tax discrimination and only a capital gain tax (which only half of the gain is income taxable) and up to her when she chooses to elect the sale for the capital gain.

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She has no FIF holdings as stated a few posts above.

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Originally Posted by couta1

Just repeating this post, this lady is NOT a trader under NZ tax law period, only a tax expert out to make extra bucks would say otherwise.

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Thanks couta1. I have a reasonable amount of knowledge and do understand all the answers. Things like FIF and suggesting that she complicate her life more by trying to become a foreign tax resident are not answering the original question and are just joise. I agree with you wholeheartedly that she's NOT a trader under NZ tax law. I was pretty sure of that when I posted but really needed people like you and some of the other commenters to say so. Not for confirmation bias. But to see if I was heading down the right thinking path and to open up our thinking if there were issues we hadn't thought about.

There has been a lot of thinking gone into this from the starting position of AML problems with the Westpac account to get to this point of liquidating. Her husband's estate still has Australian holdings and it has been a dreadful problem. Even getting probate from NZ in Oz can be difficult if you're elderly and have always done everything yourself all your life.

Her NOT being a trader doesn't of course guaratee that the IRD doesn't try it on. But I will be talking to her on the weekend and hopefully she will agree to liquidate her Australian holdings.
Someone above questioned why she would go into a PIE and made the assumption it was for tax savings. The number one reason to go into a PIE for her is so that she doesn't have to return the income on her IR3, which is administratively too difficult for her any more.* I often find it interesting how some people can't put themselves in others' shoes.

*She refuses to use experts for everything. Be it tax experts, or an accountant for her returns or a lawyer to get the probate in Australia and so on. It's partially a money thing. It's a mis-guided belief that experts make mistakes and don't know what they're talking about.

Thanks SBQ. I know you're trying to help. But she's trying to simplify her life drastically. She has no FIF holdings for that reason and it has been checked carefully. Her holding numbers are small so that's relatively easy in terms of compliance. She is very very very aware of the FIF regime and hates it with a passion. Becoming tax resident of another country is not simplifying her life. She isn't going to be in NZ equities. The money as I mentioned above will go into a diversified Pie fund (or if she's really determined to do so, an Australian Pie fund. There was never any mention of it being invested in NZ equities or funds. She has no need to save tax or get a better tax rate than a Pie. She earns way more in dividends than she spends. Buying the Pie is to simplify her life. No entry or exit fees through the likes of InvestNow and most importantly no need to enter it in the IR3. Bingo. She doesn't care if the capital gains aren't what they could be. She won't be spending the capital. She already earns from dividends a very comfortable margin over what she needs to live.

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There has been a lot of thinking gone into this from the starting position of AML problems with the Westpac account to get to this point of liquidating. Her husband's estate still has Australian holdings and it has been a dreadful problem. Even getting probate from NZ in Oz can be difficult if you're elderly and have always done everything yourself all your life.

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I've come under the same problem with AML, CRS, & FMA to the point my wife and I are serious at moving back to Canada. Despite living in NZ for almost 25 years, the only thing that really keeps us here is family relatives living here. I can't be silly about life and when I look at our children, what options do they have if they only kept their sights on NZ? Estate planning is a biggie and that is why i've structured my dad's estate to be joint held if not already gifted. While lawyers etc. do not recommend this, the game plan is when he dies, he will have nothing and since joint accounts are not part of probate, the will that he has would most likely be worth less than the paper it's written on. For the mean time, we're sticking it out in NZ for as long as he's alive.

NZ PIE funds cover everything and play by the same rules as an individual investing the assets abroad (ie FIF). The advantage is max 28% PIR which mainly benefits those on the top end of the tax bracket. Since NZ investments are limited in return, it's very hard to judge if buying say an S&P500 index ETF when if in a PIE fund eligibility, that the 5% FDR rate would net you more at the end? The following link tells a case where investing in a PIE fund is worse off as even on years with negative, they're still subjected to FIF but on the individual, they can change to CR method of FIF: https://investnow.co.nz/expect-pay-t...ment-pie-fund/

IMO, I find collecting dividends tax inefficient. This argument has been mentioned in other threads but my key reason is what erode the book value of the company by dishing out dividends when the profits can be kept and reinvested in the company ? (ie Warren Buffet way). When the book value goes up, so does the share value. Instead of collecting a dividend, the shareholder just only sell a portion of their holding if they want to take an income.

IR3 income or not, with CRS, investing into any fund, PIE, etc. bank accounts, etc. require IRD tax # and the funds report that data to IRD. No matter where you put your $ (for most part with some 110 nations around the world that subscribe to CRS), your resident tax authority will know. I a lot of cases, it does not make sense to even change bank accounts or brokers because the next one is still bound by the same CRS rules.

If you're living in NZ, your financial freedom has been limited much the same way as owning guns. The FMA basically makes it nearly impossible for a NZ resident to open an offshore / brokerage account abroad and thus, forces NZ investors to look only at local managed funds if they want to get foreign exposure.