Starting out - tax nonsense

[theArtfuldodger]

Ok, I'm sure I've read a thread discussing this before, but how exactly does the IRD go about determining 'intention'? What kind of trading time-frame would an income/profit orientated 'trader' be buying/selling over? Is there a set standard, or is it determined on a case-by-case basis?

How would each of the following scenarios be classified (all being 'on average')?

I. Someone who buy/sells over a day? (this one's obvious - a trader for sure)

II. Someone who buys/sells over a week?

III. Over a month? (are we getting into 'investor' territory here? Or could this person still scrape by as a 'trader'?)

IV. 3 or 6 months

V. 1 Year? (I'm guessing an this individual would be unarguably an 'investor').

Stinks who something as subjective as 'intention' is assessed so objectively. Anyway, how else they gonna do it I suppose... Oh and all this is obviously for tax purposes =D

Thanks.

EDIT: I want to be trading enough to be a 'trader' (tax benefits), but not so much that I do anything stupid/risky, being as inexperienced as I am.

Another noob q: could I use the expenses incurred in 'trading' (brokerage, stationary etc) to offset the tax liability on TOTAL income i.e. - income from other sources (other than shares) too? Or can expenses only apply to the income that was earned while incurring them?

Also, are losses on trades tax-deductible?

Thanks.

[Ham001]

The best advice I got was to keep things separate. Keep trading activities well away from long-term investments. Yes as belgarion has mentioned above, with recorded intentions you can create an audit trail to clarify. However at the very minimum I would personally use 2 separate broker accounts (if trading in my own name), 1 for trading and 1 for long-term investments.

The trading expenses paid in the entity (whether it be yourself personally, Trust or a company etc ) that is actively trading with the intention of creating taxable income can claim related expenses paid in the normal course of business as tax deductible expenses (eg. Internet connection, interest, brokerage, FX gains/losses etc).

But as with everything tax related, you can't rely on posts in a sharetrader forum. The FIF & PIE rules are extremely complex and quite simple the best advice you can get is to seek a professional opinion.

Cheers,
Hamish

[axion]

"Yes, but i wouldn't go the company way just yet. Don't complicate things until you really do know what you're doing. Remember the 33% tax rate kicks in at 40k, a company pays 30% from the first $1!"

Couldn't you just withdraw all profit as a salary and then you'd have 0 profit in the company and then just be taxed at your personal rate?

[shasta]

"Yes, but i wouldn't go the company way just yet. Don't complicate things until you really do know what you're doing. Remember the 33% tax rate kicks in at 40k, a company pays 30% from the first $1!"

Couldn't you just withdraw all profit as a salary and then you'd have 0 profit in the company and then just be taxed at your personal rate?

Assuming the personal marginal tax rate results in less tax being paid, then yes you could do that.

Alot of work filing company tax/annual returns, company resolutions though etc

There's also the issue of getting benefit form any tax credits the company receives, ie from dividends

I was merely pointing out, when you start out, tax friendly structures should be the last consideration, not the first few!

[axion]

Ah yeah for sure, just wanted to see if that was something you could do as I had it in my mind.

[impacman]

The definition of "intention" is the rub!

What I do is use an 'investment diary' that I treat very much like an old paper ledger. The old paper ledger didn't allow you to cook the books after the event as each line had to be sequential and each day ruled off and signed in blood. I write down why I buying something in very clear terms, stating my intentions and reasons. I always intend to hold (unless I'm buying through my trading account for which I don't have an investment diary) but only if the company meets my investment expectatiopns. If they don't - they're gone. For example, I hold XRO and the entry in my diary says hold for at least two years and particpate in capital raisings but sell if (and theres a list of factors that would show only a fool would hang-on).

On a number of occasions where I got a "please explain" requests my diary has been accepted.Note a tax expert (or tax assessor) so I don't know whether I was just lucky or whether the diary is an acceptable declaration of intent.

Hi Belg, I have taken to doing as you suggest in terms of a diary (in fact it was the wise Lawso who put me onto it over a very nice Montieths at an Auckland ST meeting). The only difference is that I have recorded mine on an excel spreadsheet. Not sure whether this is detremental compared to the "no fudging it" aspect of hard copy as you describe. All my shares are in Trust and the intent is genuinely LT investment (other than if it turns non sensical to hold). I have also talked with my accountant who is an independent trustee and suggested we print out the diary annually and all trustees sign it off at that point. He thought this sounded okay. Be interested in your (and anyone else who would like to comment) view/s as to whether this would make the grade or not. Also be interested in understanding how you define your sell factors (I am sure they would be tranferable). Your views/help would be much appreciated.

Cheers,

I-man

[POSSUM THE CAT]

Impacman Do you have A trustees meeting before every sale & purchase as you may need the minutes of these meetings as well or trust could be considered a sham.

[impacman]

Impacman Do you have A trustees meeting before every sale & purchase as you may need the minutes of these meetings as well or trust could be considered a sham.

No we don't but the other trustees have okayed me to manage the share portfolio on their behalf. The trust holds other assets as well so it hasn't been set up to solely invest in equities. Will raise this with our accountant to get their view and let you know the opinion. Thanks for the heads up though.

Cheers

[CJ]

The only difference is that I have recorded mine on an excel spreadsheet. Not sure whether this is detremental compared to the "no fudging it" aspect of hard copy as you describe.

Even a diary can be fudged. entries put in at a later date. It is just harder to delete information.

[OldRider]

impacman:

My situation seems similar to yours, I have been advised to minute every transaction as noted above. Not too difficult we have several standard forms in Word
and it just takes a minute to fill in the spaces, print out and sign.

All decisions and reasons are as well recorded in Excel spreadsheet, backups of these
are made daily to stick and monthly to CD. CD should be a true unchangeable record.

Accountant and solicitor say they are happy with system.