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Thread: Tax advice

  1. #31
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    Quote Originally Posted by Aaron View Post
    Unless you are a barrister or doctor, Jay I think you have to account for business income on an accrual basis which would include valuing closing stock.
    From an IRD Questions we've been asked:

    Quote Originally Posted by IRD -13 February 2004
    Question

    Can a taxpayer claim a deduction for unrealised share losses?
    Answer

    Generally, unrealised share trading losses will not be deductible for tax purposes.
    Taxpayers in the business of trading in shares hold shares as trading stock. Under the trading stock rules, shares must be valued at cost. Consequently, only realised losses are deductible. However, the shares may be valued at nil if they:

    • • have no current or likely future market value; and
    • • have been written off as worthless by the taxpayer.

    Alternatively, shares which are bought for resale at a profit may not be classed as trading stock, but could meet the definition of “revenue account property”. A deduction for revenue account property is available only in the later of:

    • • the income year in which the property is disposed of; or
    • • the income year in which the proceeds are derived.

  2. #32
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    Quote Originally Posted by Aaron View Post
    I thought you had to use FIFO or a Weighted Average Cost to value shares considered trading stock.
    Looks like you may be right. Not an authoritative soucre but good enough for me. Extracts from the Mater Tax guide:

    Excepted financial arrangements

    Last reviewed: 08 October 2013
    IT07 ss EA 1, EB 3(3), ED 1
    An excepted financial arrangement that is held as trading stock or revenue account property must be valued at cost. This category includes shares (other than a share acquired under a share-lending arrangement or a share-lending right), options, short-term trade credits, annuities, insurance contracts, gaming and lottery bets, emissions units and various agreements for the sale or lease of property. See s EW5
    ..., the value must be calculated using the first-in first-out (FIFO) method or weighted average cost method. In the case of shares, these methods apply on the basis of share types rather than across an entire share portfolio, eg where more than one parcel of the same type of shares is held.

  3. #33
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    Thanks guys.

    I seem to take ages to try and find what I am looking for on the IRD site.
    Use to use an accountant, he said you can use either cash or accural basis, unless you trade under a company then you must use accural basis, that is declaring unrealised losses/gain and each year you take take "cost" as the value at 31st March as you say Aaron.
    (I am mainly a salary and wage earner.)
    Overall I still make X profit or X Loss, but it is how I declare it each year.

    Think I will use the weighted average method - easier to keep track of.

  4. #34
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    Quote Originally Posted by Jay View Post
    Thanks guys.

    I seem to take ages to try and find what I am looking for on the IRD site.
    Use to use an accountant, he said you can use either cash or accural basis, unless you trade under a company then you must use accural basis, that is declaring unrealised losses/gain and each year you take take "cost" as the value at 31st March as you say Aaron.
    (I am mainly a salary and wage earner.)
    Overall I still make X profit or X Loss, but it is how I declare it each year.

    Think I will use the weighted average method - easier to keep track of.
    Sounds like your a hobby trader rather than being in the Business of share trading?

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    Yes you are right couta1. Not my main source of income by a long stretch. Mainly held for the long term, still have a long term portfolio under a Trust but now trade some (under my own name) as well for extra pocket money/to supplement income when retired - althought that is a few or ten or so years away yet.
    Rightly or wrongly, I started declaring the trades and so a bit hard to stop now but still carry on trading. Don't want to get "caught out" like w69, I think it was, did.
    Last edited by Jay; 18-03-2014 at 03:23 PM. Reason: clarification

  6. #36
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    Jay (FYI), the accrual basis does apply to Companies but for share trading purposes, where the shares are considered to be "trading stock", they are valued at cost (see section ED 1 of the Income Tax Act 2007). Share are listed as an "excepted financial arrangement" and as such are excluded from the accruals basis. Its tricky stuff to understand, but that's my understanding of the accruals rules... happy to be corrected if I am wrong....

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    Re the "discussion"on Trilogy re investment and trading; i have tracked down this thread.Worth reading imo esp KW and Harveys and others.

  8. #38
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    Quote Originally Posted by MunsterNZ View Post
    Thanks guys. It certainly is a grey area. My accountant is trying to err on the side of caution i think recommending I pay tax. I beg to differ of course but with some of the gains I have made it is a significant slice on the profits if I sell now and pay tax. Fly under the radar seems to be the general consensus and fight my case if an auditor shows up. Interesting to know if anyone was aware of any court cases in NZ relating to this matter.
    Shareinfo.co.nz have the following article on it which echoes some of the thoughts above.
    Munst.

    "New Zealand does not have a capital gains tax regime, but to say investors are not liable for income tax on capital gains is a simplification. Capital gains from the sale of shares (or any other property, such as real estate) are sometimes taxed, but when is far from clear.

    There have been various test cases in recent years regarding this issue, but regrettably there remains a "hit or miss" element to the subject. Links to the more relevant cases are shown. Under current law (section 65 of the Income Tax Act) a capital gain is liable for income tax (and a loss deductible against other taxable income) if one or more of three situations apply where:


    • 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.



    To judge whether a person is undertaking a business, one needs to look at the number of transactions entered into and the holding period before the shares were sold. There would need to be evidence that the pattern of buying and selling was continuous, perhaps over a number of years. The business need not be profitable, but there would need to be evidence that the taxpayer treated their share buying and selling as a business. Dealers usually:


    • Invest a substantial amount of capital into the market and will sometimes borrow to fund their purchases

    • Monitor their portfolios regularly — perhaps weekly or even daily; they may have a trading system of some kind.

    • They will usually spend a good deal of time researching their investments

    • They may be trading low value — high risk shares to gain leverage.



    This is in contrast to the long-term investor who generally buys a relatively small number of high quality, dividend paying shares, which they hold for years or until there is a genuine reason for selling, such as the company ceasing dividend payments, a down-grading of the future profitability, broker’s advice, adverse publicity, directors reducing their personal shareholdings, the funds being needed for another purpose, or any one of any number of other reasons.

    The second net the taxman casts is to catch those who may not be dealers in the normal sense, but where an investor buys shares with the dominant purpose of reselling them at a profit (cf holding those shares as a long-term investment). The vagueness in attempting to determine one’s dominant purpose at the time the investment was made, gives the Inland Revenue Department enormous power to deem the taxpayer’s share buying activity taxable. (Remember, in tax law, the onus is on the taxpayer to prove their innocence, not on the Department to prove guilt.)

    In determining "purpose" the Department will look at the circumstances surrounding the transaction. The investor who stags a number of new issues may find it hard to prove their intention was anything but making a quick profit.

    The confusing aspect of the law as it stands is that even though one may not be a dealer of shares, one may still be taxed on the profits if they were acquired with the dominant purpose of resale. Conversely, it is unclear whether a dealer would be taxed on share investments done outside of their share dealing business.

    Given the lack of clear and definitive guidelines we suggest investors that are traders and long-term investors operate two accounts — one for their non-taxable long-term investments and the other a taxable trading account."
    This is the best summary of the situation. It should be noted however that the mere separation out of activities that are stated to be trading, (perhaps through a different broker) and those that are claimed to be investing in and of itself will not be considered to be a definitive sole measure of intention even if done so through separate legal entities, (for example by conducting trading through a company or trading trust). The argument that you can effectively and definitively separate trading and investing activities because they're traded through different accounts and brokers doesn't hold water of itself in as much as the fact that one's intention needs to be evidenced by one's investment behaviour, (actions speak louder than words as far as the IRD are concerned).

    Further, even separating trading activities into a separate company doesn't disassociate you from your other trading by virtue of the associated person's test in the Income tax Act.

    Put simply, while separating out activities is a good idea for active traders, your investing through your investment account will still be objectively measured if push comes to shove by the IRD based on the evidence of your investing patterns more than anything else not which account you invested through and if you buy and sell shares on a pretty regular basis in your investment account which you claimed were bought with the intention of being long term investments, the fact that you're trading through a separate account for really quick trades won't help you much, in fact it could be argued the IRD will use that against you and either by association, (associated persons test) or direct link between claimed left and right hand of the same individual, they could easily make the case that ostensibly all your activities are trading.

    Its a murky area of the law and people would be well advised to take advice for their particular circumstances from a good quality accountant or tax lawyer with expertise in this area if they have concerns but in general if you are going to separate out your activities make sure your long term investing activities really are just that and when in doubt whether you'll be investing long term or not put it through your trading account so you don't taint your true investments.

    In terms of what constitutes long term investment investors might want to consider the Government's moves in respect of the brightline test regarding property transactions. Anything sold within 2 years is automatically considered to be on trading account. This shouldn't be interpreted to mean that investors holding shares for longer than two years and one day are automatically exempt from trading, most especially so if they invested in growth companies that don't pay dividends

    http://www.interest.co.nz/opinion/78...and-parliament
    Last edited by Beagle; 26-11-2015 at 12:53 PM. Reason: Improve grammer, add content and link.

  9. #39
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    Definitely murky alright and if IRD says your "intent" was to trade for profit you have to prove you weren't.Int that some traders also get get turned down being reclassified as traders because of all the losses they can claim on. Go figure!!

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    Quote Originally Posted by Joshuatree View Post
    Definitely murky alright and if IRD says your "intent" was to trade for profit you have to prove you weren't.Int that some traders also get get turned down being reclassified as traders because of all the losses they can claim on. Go figure!!
    Human nature everyone is an investor in land and shares when things are going up but it is surprising how stated intentions turn from investing to trading/speculation when a downturn hits and losses are made.
    A comprehensive capital gains tax might sort this out better. Although I guess I need to understand how it works in practice as you would still be arguing over capital/revenue distinctions as they would involve different tax rates. Maybe John Key is right, too complicated. How about a two year brightline test for shares as well as property? If you are investing long term surely two years isn't long at all.

  11. #41
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    from earlier in the bread -

    To judge whether a person is undertaking a business, one needs to look at the number of transactions entered into and the holding period before the shares were sold. There would need to be evidence that the pattern of buying and selling was continuous, perhaps over a number of years. The business need not be profitable, but there would need to be evidence that the taxpayer treated their share buying and selling as a business. Dealers usually:


    Invest a substantial amount of capital into the market and will sometimes borrow to fund their purchases

    Monitor their portfolios regularly — perhaps weekly or even daily; they may have a trading system of some kind.

    They will usually spend a good deal of time researching their investments

    They may be trading low value — high risk shares to gain leverage.
    Brilliant - I feel that that has more meaning than 'intent'
    “In a roaring bull market, knowledge is superfluous and experience is a handicap.”

    –Benjamin Graham”

  12. #42
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    Heres one earlier thread re being classed a trader or investor. There is at least one other. thread with more in it.

  13. #43
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    A friend of mine asked me if you have to pay extra tax on dividends on top of the imputation credits already paid. I said, I don't know, but will ask sharetrader, where there is a lot of knowledgeable people. Anyone know about tax on dividends? Thanks sw.

  14. #44
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    Quote Originally Posted by see weed View Post
    A friend of mine asked me if you have to pay extra tax on dividends on top of the imputation credits already paid. I said, I don't know, but will ask sharetrader, where there is a lot of knowledgeable people. Anyone know about tax on dividends? Thanks sw.
    All NZ dividends have 33% deducted from them. This is made up of the imputation credit and the withholding tax. If your marginal tax rate is less than 33% then you would get a refund. If not then you have fully paid your tax.

    Foreign dividends have anywhere between 0 and something more deducted and you then would have to pay at what ever marginal rate you we are on. This is done in the foreign income section of the tax return, not the dividend section. A credit for overseas tax paid can also be claimed depending on the source of the dividend.

  15. #45
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    Quote Originally Posted by 777 View Post
    All NZ dividends have 33% deducted from them. This is made up of the imputation credit and the withholding tax. If your marginal tax rate is less than 33% then you would get a refund. If not then you have fully paid your tax.

    Foreign dividends have anywhere between 0 and something more deducted and you then would have to pay at what ever marginal rate you we are on. This is done in the foreign income section of the tax return, not the dividend section. A credit for overseas tax paid can also be claimed depending on the source of the dividend.
    Thanks 777, will pass it on.

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