Share investments and tax

Inland Revenue has released draft guidance on share investments and it’s a helpful reminder that capital gains are sometimes taxed in New Zealand.

As platforms such as Sharesies have made direct investment in shares accessible and affordable to more people, there has been an uptake in direct investment in shares – and like all things, this has a tax consequence.

New Zealand tax rules can be complex around share investments, and many have been caught out upon finding their foreign share portfolio is subject to tax under the foreign investment fund (FIF) rules or when it transpires their share trading activities have given rise to taxable income. Inland Revenue appreciates the average person with overseas shares or who dabbles in share trading is probably not aware of these rules and so, as part of an education-first approach, it has released a draft interpretation statement. Here is an outline of what Inland Revenue’s view of the rules are.

Ordinary tax rules

Ordinary tax rules apply to investors who hold:

Shares in New Zealand companies.
Shares in Australian companies that are exempt from the foreign investment fund rules (broadly larger ASX listed companies).
Foreign shares and other attributing interests (that are not exempt) that cost NZ$50,000 or less, where the holder has not opted into the Foreign Investment Fund (FIF) rules.

Find out more about FIF rules in our article: Overseas Share Investments Tax Implications

Dividends and taxable income

Dividends received by investors are taxable income in New Zealand under ordinary tax rules, regardless of whether the dividend is a cash payment or some other transfer of value from a company (commonly called a deemed dividend).

Because New Zealand companies report their dividends to Inland Revenue and have tax withheld on behalf of the investors, the only requirement for investors generally is to confirm that the information held by Inland Revenue is correct and to pay a top up when they are in the 39% tax bracket. If information held by Inland Revenue is not correct, there will be a requirement to self-report any omitted dividends. The most common example of this is distributions by energy consumer trusts such as the Entrust distribution received by many Aucklanders.

Where dividends are received from overseas companies, there is a requirement to self-report them in an income tax return. In addition, while withholding tax is generally deducted in the overseas jurisdiction, and available as a tax credit, this is likely to be less than the amount of New Zealand tax payable and therefore a top-up payment will be required. In some instances, New Zealand investment platforms will handle the top up themselves.

When are Share Sales Taxable?

The draft guidance goes into a considerable amount of detail about taxable share sales. This comes as no surprise as there is a common misconception that gains on disposing of shares are never taxable, whereas in fact they are where the shares were acquired:

For the dominant purpose of disposing of them; and/or
As part of a business of share dealing; and/or
As part of a profit-making scheme

The dominant purpose is measured at the time of purchasing the shares and, while it might change during the period of ownership, these later changes do not have an impact on the tax outcome. If someone bought shares with the dominant purpose of disposing of them, and then later decided to hold them long-term, nevertheless any gains on ultimate sale will be taxable. It is also noted that purchasing shares for the long term and having a vague or general hope they will increase in value and might be sold in the future would not on its own create a dominant purpose of disposal.

When determining what the dominant purpose is, Inland Revenue will consider the following factors:

The nature of the asset
The length of time the shares are held
Circumstances of the purchase, use and disposal of the shares; and
The number of similar transactions

Investors need to be able to support assertions that they did not have a dominant purpose of disposal. Examples of documentary evidence include information obtained from the company, platforms or broker used when deciding what shares to buy, information on expected dividend yields, or any lending records if funds were borrowed to invest.

Are you dealing in shares?

For someone to be seen as a share dealer, a combination of (or all of the following) factors would need to be present:

A high volume of regular activity (buying and selling)
An intention to profit from share sales
Regular or continuous monitoring of the share portfolio
There is a system according to which shares are bought and sold
Sales are frequent and part of the person’s normal operations in the course of making profits
Large amounts are invested; and
The person spent a significant amount of time on the dealing activity

A profit motive does not necessarily need to exist for a business of share dealing to arise. Inland Revenue points out there is a high bar to be in a business of share dealing and there needs to be a sufficient amount of activity, time and money invested. Someone dabbling in Sharesies as a hobby is unlikely to have a business of share dealing.

We appreciate that terms like “frequent” and “significant” are vague, which is part of the battle when dealing with tax issues. Every situation is different, so we look at each client’s activities and circumstances as a whole when ascertaining what tax they will need to pay.

Claiming expenses

No costs or expenses can typically be claimed where an investor’s share sales are not taxable, but they can be claimed when the share sales are taxable. Inland Revenue points out where a loss is claimed, it may ask for information to confirm the shares were held on revenue account and might ensure that investors consistently treated any profitable sales as taxable.

If you have any queries about the tax treatment of your investments, please contact us.