Capital Gains/Loss Tax on Bonds

[BIRMANBOY]

If you want to be SURE contact the IRD or talk to your accountant (as long as they are CPA)

Yes. It seems from this definition that perpetual bonds (eg IFTHA) and reset securities (eg RBOHA) are not 'excepted financial arrangements', and therefore capital gains or losses are taxable.

However, preference shares (eg KCSHA) are 'excepted financial arrangements' and capital gains/losses are not taxable.

However, I would like to be sure before I fill in next year's tax form.

[Dubdee]

if you are a trader all income is assessable and losses deductible.

If you are not a trader then the income from bonds is subject to the accrual rules ( over the life of the arrangment income is everthing that came in less the arangement cost). Special rules apply to how that income is apportioned each year. Trusts and companies must use the accrual rules, a private individual holder may return the cash payments only . However over the life of the holding you must return the same amount: All that came in less cost. So there is no tax free income on a bond. Remember a bond is a debt security so preference shares are not bonds. However for capital account holders there is a snag.

If the sale price is below cost price the return might be negative, thereby giving a loss. This would be normally tax deductible. However if the loss is due to issuer specific causes ( reduction in issuer credit standing or rating, insolvency or a compromise with creditors (read Blue Star) the the loss is not deductible. To my knowledge this has never been tested in court.

Since everthing is assessable but sometimes some capital losses are non deductible, there is no point in holding bonds on capital account. you should be always be a trader if you hold bonds.

[Snoopy]

If you are a trader all income is assessable and losses deductible.

If you are not a trader then the income from bonds is subject to the accrual rules (over the life of the arrangement income is everything that came in less the arrangement cost). Special rules apply to how that income is apportioned each year. Trusts and companies must use the accrual rules, a private individual holder may return the cash payments only.

Are you sure about that? I once held a bond in my own name on which I made a small capital loss when it matured. I did as you suggested and paid tax in accordance with the cash payments only, with a wind up calculation to account for the loss at the end. However, I was told that subsequent to me buying that bond the tax rules had changed. That means that while what I did was OK, if I did the same thing again I would be subject to the accrual rules and that effectively means (in this example) drip feeding my roll up calculation loss against the bond income assuming that I would hold the bond to maturity, even if I did not do so and sold out early. IOW the accrual rules now apply to individuals as well.

Since everything is assessable but sometimes some capital losses are non deductible, there is no point in holding bonds on capital account. You should be always be a trader if you hold bonds.

Perhaps, but if you just hold one or two bonds in reputable companies, I think the amount of time and money setting up different trading entity should be evaluated against the unlikely event of your blue chip bond going belly up.
Personally I don't know anyone who has set up a trading entity just to hold bonds.

SNOOPY

[CJ]

Snoopy - I am pretty sure the cash basis person rules are still there. Maybe you are richer than the maximum criteria to which they apply?

[Xerof]

CJ, where can I find a definition of a financial arrangement, in the context of hybrids traded on NZDX? I'm wondering if I will need to file an IR3K for next year on a sale of OCFHA

I am definitely a cash basis person, as defined

[CJ]

CJ, where can I find a definition of a financial arrangement, in the context of hybrids traded on NZDX? I'm wondering if I will need to file an IR3K for next year on a sale of OCFHA

I am definitely a cash basis person, as defined

The legislation was linked in post #9 (quote below). If you look around that part of the act, you will get all the answers, if you can interpret it. Actually I lie, that is only half the story as you need to look at determinations as well but it is a good start.

I dont see a carve out in the excepted financial arrangement definition:
http://www.legislation.govt.nz/act/p...LM1515242.html

A perpetual doesn't fall within the definition of 'share'

[Xerof]

Thanks

you were right, someone is trying to clear my brain matter of the walls

[Dubdee]

Simply put the accrual rules apply to all investors in debt securities and they are quite simple: income is everything that came in less the cost of the arrangment, over its life. However where it gets complicated is how to report it over any income year. Trusts and companies must use a spreading system such as yield to maturity, whilst indivuals if they are small holders can record annual income using cash bais excpet for the final year where any "capital" gain or loss must be captured. Over the whole life income should be the same. I use YTM. I doubt if there is anyone in IRD quafied to check my calculations (whats the YTM on a perpetual bond bought at a discount?)

However I have taken a bath on bond defaults (Credit Sails and Blue Star) and the only way to get relief on the loss is to be a trader which I am in my bond holding entity. Loss cause by issuer credit events for capital holders does not gain tax relief.

[CJ]

(whats the YTM on a perpetual bond bought at a discount?)

YTM probably doesn't apply to perpetuals so you would need to use one of the other methods?

But you are right, in theory simple, in practice, no one knows whether they are right or wrong but the IRD doesn't know any better.

[Jessie]

Isn't OCFHA defined as a preference share in which case it is an excluded financial arrangement? In that case, capital gains may not be taxable.