PONSONBY PROFESSIONALS
LOGAN GRANGER:
GAIN ON SALE OF SHARES – TAXABLE OR NOT OR MAYBE? We have recently seen a noticeable increase in the number of people (more inexperienced) dabbling or investing in shares. Several easy to trade app-based platforms such as Sharesies and Hatch, providing ability to invest small amounts at a time, and the reduced return from bank deposits have contributed to this increase. While the investment in shares provide a good alternative, all investors, regardless if they are investing purely for the long run or for a short run for quick gains, or have a foot in both camps, need to be aware of the current tax rules relating to income from these shares and also potential gains or losses on disposal of these shares. As different tax rules exist for taxing overseas share investments, this article is primarily concerned with the tax impact of investment in shares in New Zealand owned companies by individual investors, who form the majority of this readership. It is not difficult to understand and digest that the most common return to investors are dividend payments, akin to fruit from tree, and dividend income forms part of taxable income irrespective of the category of investor you fall into. While there is no capital gains tax in New Zealand, income from sale of shares is taxable in certain circumstances. Casual and new entrants may assume that they are not required to pay tax on any profits from sale of shares as they are considered to be capital gains. In some cases they are treated as capital gains however there are provisions in the tax act which provide the ability to tax gains on disposal of shares. According to Inland Revenue: Share sales are personal property and usually non-taxable, except if the seller: · Originally bought the shares for resale instead of longterm investment · Deals in shares In these two situations, any profit from the share sale will be taxable – the seller will need to include it as income in their tax return. There is also a third category where a person entered into an undertaking or scheme to make profits with the shares purchased (unlikely to be applicable to most of you).
Under the first category stated by IRD, if the shares are purchased with a pure intent to resell to reap the profits then the gains become taxable. As an example, if a New Zealand company sets up to produce and market the Covid-19 vaccine as well as related PPE products then there will be a reasonable expectation of the value of shares to rise in the initial phase due to the demand these products have. Assuming the intention of an investor at the time of purchase is to make a quick gain, even if the investor hold the shares for five years and then sell them, he would still be taxable on the gains. Looking at another investor who has been mostly buying and holding shares and acquired the shares in the company as above, then sells the shares in say year three, he won’t be subject to tax on gain as the intention at the time of purchase for this shareholder was to buy and hold. If IRD decides to review your transactions, they would take into account the volume of shares being bought and sold as well as the level of profits being made and not to forget the speed of turnover! It would be very easy to gather information from app-based platform providers and in hindsight it becomes easy for IRD to consider a taxpayer to be dealing in shares by looking at the past transactions and the established trading pattern. A person who is considered to be dealing in shares is always subject to tax on gains and conversely able to get a deduction for any loss. It is important to note that the shares on hand are to be valued at cost at year end to determine the profit or loss made from trading. We hope this opens your eyes towards the potential for IRD to want a share in your disposal gains, which historically most have considered to have no tax exposure. The tax rules are complex and forever changing. Please contact your usual JACAL contact or one of the partners for further information and help. (LOGAN GRANGER) PN Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.
JOHNSTON ASSOCIATES, 202 Ponsonby Road, T: 09 361 6701, www.jacal.co.nz
58 PONSONBY NEWS+ April 2022
PUBLISHED FIRST FRIDAY EACH MONTH (except January)
