What makes a Trader v Investor

[Snoopy]

Wondering if someone can help with a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

I would say it depends on when you bought the head shares.

Scenario A: If you bought the shares:

a/ after the non-renouncable rights offer was made BUT
b/ cum the non-renouncable rights offer closing date AND
c/ decided to sell the same number of head shares you would acquire via the non-renouncable offer, effectively arbitraging a higher 'market price' of the shares against the lower acquisition price of shares that you would obtain via the non-renouncable offer. THEN
d/ the IRD could argue that you must have bought the head shares with the intention of selling a portion of them. IOW the difference between the price you paid for the shares 'off market' and the price you sold those same number of shares 'on market' is a taxable profit.

However,

Scenario B: If you have held your head shares in an investment portfolio before the non-renouncable offer was notified to the stock exchange:

a/ You would not have known that such an offer was coming on the table. AND
b/ The offer means that your formerly 'balanced' share portfolio would become unbalanced, after you have taken up your shares in the non-renouncable offer.

In this instance it is perfectly legitimate to reduce your expected balance of shares as well as taking up the non-renouncable offer by selling a few shares you already own today in advance of that offer closing (if you wish). The IRD cannot argue that you are 'arbitrage trading', because there is no way you could have known about such an arbitrage opportunity in advance. It is perfectly accepted 'investor behaviour' to adjust the market position of your portfolio periodically to take account of relative market price level changes. Such adjustments if made annually, or in accordance with an unexpected market event (of which a cash issue is one kind) is legitimate investor behaviour that is not generally taxable from a capital perspective.

SNOOPY

[Snow Leopard]

Wondering if someone can helpwigh a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

The answer is YES. Plain & simple.

[Southern Lad]

The answer is YES. Plain & simple.

But what if the existing shares that are held as a long term investment were sold before the rights to the new shares were taken up (I.e. sell to buy back at a cheaper price)?

Often share prices fall while a capital raise is underway, which often limits the arbitrage.

[clearasmud]

Wondering if someone can helpwigh a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

I see you have a big position in SFR.
Just wondering why you feel so confident about this share.Is it the industry, management or risk return calculation?

[Snoopy]

Wondering if someone can helpwigh a question I have.

a company I have shares in is doing a retail non renounceable rights offer. I have a relatively substantial holding approx 15-20% of my listed equities, the offer price per share is $4.30 per share, the current share price is approx $5 per share so there is an arbitrage opportunity of a bit over 10% prodit.

would taking part in the rights offer and selling the same number of shares on market be seen as trader behaviour in the eyes of IRD?

appreciate all your info and wisdom

The answer is YES. Plain & simple.

The Snow cat has answered a shortened version of your question Mr Slothbear that he has 'cut down' in bold. That shortened version of your question directly links a buy and a sell act in a way that sounds like your 'diary entry aim' is to make a profit on those two transactions. If that is true, then his answer 'yes such a profit is taxable' is correct. However, because the distinction between 'trader' and 'investor' is a matter of intent, and intent puts your transaction in a wider context, then attempting to answer your question while removing that wider context is liable to give you the wrong answer.

We can only go from the information you have supplied us Mr Slothbear. The context of your question was that you considered your existing shareholding on the high side in your overall portfolio composition, before the non-renouncable share issue was announced. Now what would have happened if you had sold down your shareholding the day before the non-renouncable share issue was announced? Would you have even put your question to the forum? I suspect not. As an investor you are allowed to rebalance your capital to avoid your portfolio being overtly concentrated in one particular investment. There is no automatic tax liability incurred in doing this.

The way I read your question, it sounds like the non-renouncable share offer was a 'wake up call'. It highlighted that should you take up your non-renouncable rights, then your portfolio composition would become even more unbalanced. Thus the 'share offer' was 'a call to action' to make sure your portfolio weighting in this particular share didn't go even higher. It comes down to:

1/ If your intent in selling the head shares is to downsize that part of your portfolio, then any profit you make from this one transaction is non-taxable.
2/ Likewise any profit (unrealised in this instance) that you make by assisting with a capital raising and then finding that your newly subscribed for shares are trading at a price higher than what you subscribed to them for is non-taxable.

But there is no reason to link these two transactions. One is not the mirror image of the other! In the first transaction the company neither pays out nor receives any money. In the second transaction, the company receives new capital to help recapitalise their business.

The fact that you, Mr Slothbear, have chosen to link the two transactions because the 'number of shares match' is a mind trick you have played on yourself. Who decided the number of shares you propose to sell on the market, exactly matched the number of rights you were allowed to take up? It would have been you would it not? What would have happened if you had made a different decision: To wait until you received your non-renouncable rights, and then sell all of your existing shares on market (while still taking up the rights). Would you then advocate paying tax on profits from the shares you sold that matched the rights you are about to take up, but not pay any tax on profits made on the balance of the shares sold because they did not have a matched pair transaction in the rights offer?

Of course there is nothing to stop you 'changing your intent', and reformulating these two quite separate transactions -it must be said- as a 'trade' and paying tax on it if you so wish. But if you are not a trader, why would you do such a thing?

SNOOPY