Tax advice

[MunsterNZ]

Hello,
Can you guys help me on what my tax implications are for my share portfolio in NZ. I invest on the ASX, live in NZ and trade in only around 3-4 stocks per year. Different accountants give me a different opinion stating that to be a trader you need to make a certain number of trades per year. Again each accountant differs with what the minimum number is. IRD rules are hazy on this.
Is any gain in stocks considered capital gain and as such not liable for any tax payment? I understand that any dividend payments are taxable...fair enough.
Any help would be appreciated.
Munster.

[Snow Leopard]

All of the different accountants opinions are correct.

Welcome to a wonderful grey area of NZ tax.

But in theory it is all about intent at the time of purchase did you buy them for:
a) the income (then why did you sell them?);
b) the hope of a capital gain.

Then there are the FIF rules for overseas shares and how those rules apply to individual Oz stocks, you will need to know about that.

Best Wishes
Paper Tiger

[peat]

The law is perfectly clear.
all you need to do is truthfully answer this question: why did I buy these shares?

[noodles]

Income tax on dividends and FIF taxes still apply.

The FIF tax is for total investment over $50K.

[Harvey Specter]

The law is perfectly clear.
all you need to do is truthfully answer this question: why did I buy these shares?

Correct. The problem is IRD wont beleive you so will look at other eveidence to determine such as frequency of trades etc.

My tax adviser (a lawyer, not an accountant) said that unless you declare yourself to the IRD as being "in the business of trading" then you are considered an investor, even if you "trade" a portion of your portfolio.

Incorrect but practically, probably true. There are a number of tests including 'amounts derived from busines' and 'personal property acquired for the purpose of disposal'. Your lawyers advice only covers the first.

Each individual investment should be tested. For example, you are a long term investor, but you get a hot time that a share is going to be taken over, so ignoring insider trading, you buy on the tip and sell 4 weeks later at a 50% profit. That should be taxable as you acquired the share for the purpose of disposal.

Thats an obvious example. BUt take XRO for example. They have stated they wont be paying dividends in the foreseable future. So the only reason to buy is for 'capital' gain. Not sure on this one.

[couta1]

Correct. The problem is IRD wont beleive you so will look at other eveidence to determine such as frequency of trades etc.

Incorrect but practically, probably true. There are a number of tests including 'amounts derived from busines' and 'personal property acquired for the purpose of disposal'. Your lawyers advice only covers the first.

Each individual investment should be tested. For example, you are a long term investor, but you get a hot time that a share is going to be taken over, so ignoring insider trading, you buy on the tip and sell 4 weeks later at a 50% profit. That should be taxable as you acquired the share for the purpose of disposal.

Thats an obvious example. BUt take XRO for example. They have stated they wont be paying dividends in the foreseable future. So the only reason to buy is for 'capital' gain. Not sure on this one.

Grey,Grey and more Grey and unless your in The Business of Share trading why worry just fly under the radar as I'm sure most do,re Xro and the like they may pay a divvy one day and capital gain is fine,remember rule number one NZ doesn't have a capital gains tax at this point in time so is different from a pure profit driven trade,some more Grey anyone?

[Harvey Specter]

Agree - fly under the radar and the best way to do that is not to make any adjustments in your tax return as that could spark their interest. Doesn't mean it is right.

[couta1]

Agree - fly under the radar and the best way to do that is not to make any adjustments in your tax return as that could spark their interest. Doesn't mean it is right.

True but because everything is so Grey its not wrong either,we shall call it a neutral stance then

[Harvey Specter]

The "personal property acquired for the purposes of disposal" does not apply as that is more aimed at someone who is buying and selling goods (eg. antiques, ebay traders, second hand car dealers etc)

Practically you may be right, technically you are wrong. Personal property is anything that isn't real property (ie. land).

This is the issue with the current rules. If IRD decided to change their approach, the courts would be required to read the legislation correct.

[MunsterNZ]

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."