Starting out - tax nonsense

[CJ]

I am not sure why she cant use the IC to offset PAYE. Have the interest expense wiped out the income already? They will be converted to a loss and carried forward to be used next year.

IC's cant be transfered from person to person.

From a planning perspective, it would have been better for the share and the loan to be in your name, not joint name.

[fish]

I am not sure why she cant use the IC to offset PAYE. Have the interest expense wiped out the income already? They will be converted to a loss and carried forward to be used next year.

IC's cant be transfered from person to person.

From a planning perspective, it would have been better for the share and the loan to be in your name, not joint name.

My accountant has approached IRD this week and they still wont allow imps to offset PAYE .

I think the best way to approach this is to sell enough shares to get rid of the margin loan and to further decrease the imputation credits allocated to my wife we could split the assets equally with the share portfolio into our separate names with the telecom shares going to my wife and the vector to me.The fixed income/bonds to my wife etc .
I would then take out a margin loan again but this time in my own name and buy back the shares I sold

[skeet]

Share Losses - Deductions
Court of Appeal Decisions

Introduction
In two recent test cases Inland Revenue asked the Court of Appeal to clarify when taxpayers may deduct losses incurred on the sale of shares. The Court said that those losses are deductible if the taxpayers would have been taxed on any profit from the sale of those shares. In the light of these decisions, this article outlines when profits from share transactions will be assessable and
when losses from share transactions will be deductible. It also sets out how Inland Revenue will apply these Court decisions to taxpayers who claim deductions for losses on share sales.
The test case results will also be relevant to the taxation of transactions in other types of personal property and to land sales (under section 67(4)(a) of the Income Tax Act 1976). However, this article covers only the tax treatment of share transactions.

Background
The Court of Appeal decisions in C of IR v Stockwell (CA 119/92) and C of IR v Inglis (CA 116/92) were delivered on 19*November 1992. These will both have important implications for some taxpayers. They decided that if taxpayers buy shares and would have been liable for tax on any profits or gains from selling the shares, then any losses they incur on that sale are deductible. The decisions apply only to people who trade in shares (or other property) as a business, or who buy shares for the purpose of reselling them. The Court drew a clear distinction between these people and others who typically invest spare money from time to time, hoping for dividends and some capital growth. Proceeds from these casual transactions would be neither taxable nor deductible.

Taxation of Share Sales
Profits or gains from the sale or other disposition of company shares are assessable for income tax if:
(a) The profits are business profits (section 65(2)(a) of
the Income Tax Act 1976); or
(b) The taxpayer is in the business of dealing in shares
(section 65(2)(e), 1st limb); or
(c) The taxpayer acquires the shares with the purpose of
selling or otherwise disposing of them (section
65(2)(e), 2nd limb); or
(d) The profits come from any undertaking entered into
or devised for a profit making purpose (section
65(2), 3rd limb).
“Acquired for the purpose of selling”
Profits from selling shares are taxable if the taxpayer acquired the shares with the purpose of selling or otherwise disposing of them. However, sometimes taxpayers buy shares for more than one purpose, and may be uncertain about the tax treatment of those share transactions. In these situations the dominant purpose at the time of buying the shares is the relevant one. Often ordinary investors acquire shares to make capital gains from their growth in value, as well as to earn
income from dividends. In this situation there is no clear purpose of resale when the shares are bought, so any profit on sale would not be taxable. Neither would any losses be deductible.
To work out whether the profit (or loss) from a taxpayer's share sales are assessable (or deductible), it is necessary to look at each individual parcel of shares that the taxpayer sells during the year, and the purpose for which s/he acquired those shares.

What the Cases said
This article concentrates on the Inglis case, which is the main judgment about taxing share sales. The Stockwell case agreed with the decision in Inglis, and also considered the sort of behaviour that would show that a taxpayer was in the business of dealing in shares (section*65(2)(e), 1st limb).
In the Inglis decision the taxpayer had sold properties and invested the proceeds in the sharemarket until he and his wife were ready to purchase a larger house. The share market crash meant that he made substantial losses on those share investments. He wasnt in the business of dealing in shares, but the fact that he bought the shares to sell them when he and his wife decided to buy a house proved that he had bought the shares with the clear and dominant purpose of reselling them. If he
had sold any of the shares at a profit, that profit would have been taxable as profits from property acquired for the purpose of resale (section 65(2(e), 2nd limb). The Court of Appeal reasoned that the Act allows deductions for expenditure or loss in gaining or producing assessable income (section 104), but section 106 (1)(a) prevents any such deductions for capital losses. However the Court considered that this prohibition only applies to losses of fixed capital and that money used for
share trading effectively changes to circulating capital (i.e., .the cost of trade.). Thus, in substance, the shares became stock in trade, were held on revenue account and any trading loss on them would be deductible under dection 104. This means that a taxpayer who is in the business of dealing in shares or who buys shares with the dominant purpose of reselling them can claim a deduction for any loss realised on the resale of those shares. The practical effect of these decisions is that where a
taxpayer acquires shares with the dominant purpose of reselling them, then in the year of sale: (a) the taxpayer will be assessable on any profit from the sale (i.e., the amount by which the sale price (less any brokerage) exceeds the cost price (plus any brokerage)); (b) the taxpayer may claim a deduction for any loss on the sale (i.e., the amount by which the sale price (less any brokerage) is exceeded by the cost (plus any brokerage)) (c) expenditure incurred to acquire shares will be deductible and the amount of any difference on resale will be taxable or deductible, as the case may
be. Taxpayers who seek to deduct share sale losses (where profits would have been assessed under the 2nd limb of section 65(2)(e)) have the onus of showing that when they bought the shares they had a clear and dominant purpose of reselling them. The requirement for taxpayers to show their clear and dominant purpose in acquiring shares was established in C of IR v National Distributors
(1989) 11 NZTC 6,346. In that case, the court envisaged that taxpayers would point to the following
types of activities in order to give an objective indication of their purpose in acquiring shares
. regular and systematic reviewing of their share portfolio . whether they adopted a coherent pattern of sales and purchases; . if they had sold shares for no other apparent purpose
than for trading; . whether the shares were held for a relatively short
period; . the taxpayer.s vocation; and . any other relevant circumstances about their acquisition
and use of the shares.

Example
Chris is not a professional gambler, but likes to go on tours to big overseas racing carnivals two or three times a year. She funds each trip by investing on the sharemarket (she finds the returns are better than the TAB) and realising the investments when she makes her travel arrangements. She invested $8,000 to provide for her Melbourne Cup trip (the total cost was $8250, once brokerage was included). However, when she sold the shares she only got $3,880 ($4,000 less brokerage of
$120). Chris spent that November at home but got some consolation by working out that she could deduct $4,370 (i.e. $3,880 minus $8,250) from her assessable income for that year.

Summary
The Court of Appeal decisions in C of IR v Stockwell and C of IR v Inglis allow taxpayers who trade in shares (and other property) as a business, or who buy for the purpose of reselling (and would therefore be taxable on any profits from those transaction) to deduct any losses they incur on those transactions.

http://www.ird.govt.nz/technical-tax/tib/vol-4/

[Aaron]

Fish I can't understand how the imputation credits can't be used against her tax and the PAYE refunded unless your wife has invested via a trust or a company that is not an LAQC company.

If the investments are in her own name there shouldn't be a problem with NZ imputation credits (not Aussie franking credits) and she should get her PAYE refunded with any losses from excess imputation credits carried forward.

[fish]

Fish I can't understand how the imputation credits can't be used against her tax and the PAYE refunded unless your wife has invested via a trust or a company that is not an LAQC company.

If the investments are in her own name there shouldn't be a problem with NZ imputation credits (not Aussie franking credits) and she should get her PAYE refunded with any losses from excess imputation credits carried forward.

Thanks Aaron.
Thats what I would have thought-but my accountant says otherwise . Have you got any links I could go to ?

[Aaron]

You can try the IRD website an IR274 discusses the imputation system. I imagine your accountant would have it right maybe you just need him/her to go over it and explain things better.
I imagine there is more to it than I am aware but it seemed odd. With $40,000 imp cr that would be $133,333 gross dividend which would put your wife in the top tax bracket depending on the margin loan interest. can't really advise but hypothetically if your wife received "in her own name" $133,333 gross div and $40,000 imp cr( @30%) plus $20,000 wages with $3,900 PAYE (@ 19.5%) less margin interest say $70,000 (7% of $1,000,000) then in her 2009 income tax return she would have $16,960 imp cr to carry forward and a refund of $3,900 tax.

[fish]

Saw the accountant yesterday-you are absolutely correct Aaron .
When he told me I couldnt use her imputation credits and she would have to carry them forward -he meant the 40000 less the 4000 Paye which will be claimed back

[buxlo12]

Does anybody have any experience with PIR rates for listed companies. Can you select your PIR or does it default to 30%? Can you nominate your PIR if you are investing via a company, or trust.

Per the IRD website PIR for:
Company is 0%
Trust either 0%, 21% or 30%


Can a trust nominate two investments with different PIR. One at 0% so an income can be offset against deductions i.e. accounting fees. The PIR for the other listed entity be 21% to be a final tax?

If the trust PIR is 21% and it retains its profits in the trust (no distributions to beneficiaries) will it have to included that income in its tax return as it is not at the correct rate?
If the trust PIR is 30% and it retains its profits in the trust (no distributions to beneficiaries) will it have to included that income in its tax return. or is the 30% PIR considered a final tax and does not need to be included in the trust tax return?

[CJ]

I believe a PIR for a trust is only a final tax if it is 30% unless it is distributed to beneficiaries.

You can still deduct expenses even if the PIR is a final tax.

[buxlo12]

Yes you can still deduct expenses however I don't want to be accruing losses in my trust with no income to offset.
I also do not want a tax bill where I would I would have to either sell shares or contribute funds.