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. We take the opportunity to outline IRD's view of the rules. 

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 FIF rules.

Dividends

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 are 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.

Taxable share sales

The draft guidance goes into a considerable amount of detail about taxable share sales, spending nine pages discussing the point. 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. 

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 our tax specialists look at each client’s activities and circumstances as a whole when ascertaining what tax they will need to pay.  

Claiming expenses 

The guidance spends a page discussing the claiming of 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. Where investors cannot trace the cost of specific shares sold, then the cost price can be determined using the “first in, first out” or weighted average cost methods. 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. 

Other income 

The draft guidance concludes the ordinary tax rules section by discussing two related items. 

First is share lending. This is where an investor’s shares are lent to a broker who then returns them at the end of the lending term. The rules in this area are complex, with varying tax treatments. Professional advice is recommended. 

Second are foreign currency accounts. The draft guidance reminds us that the financial arrangement rules apply to an investor’s foreign currency bank accounts and where applicable, could result in an income tax liability for a foreign exchange gain or loss. 

Transitional residents

The draft guidance comments that transitional residents (broadly people who have migrated to New Zealand or have moved back here after an absence of more than 10 years) are subject to concessional treatment and would only be taxed on the above items in relation to investments in New Zealand companies or from carrying on a business of share dealing in this country. 

FIF rules 

Inland Revenue covers the FIF rules over a mere 2.5 pages, unlike the comprehensive discussion around the ordinary tax rules. It is pointed out the FIF rules are complex, fact-specific and Inland Revenue already has guidance on the topic. 

What the statement does not cover

Notably, it does not cover cryptoassets. While Inland Revenue’s indicative view is that investments in cryptoassets should be treated consistently with investments in gold, this has never been formally spelt out in a Questions We’ve Been Asked or an Interpretation Statement, and there is no indication that Inland Revenue will issue formal guidance in the near future. We are coming across more clients with cryptoasset transactions and while the binding ruling process is helpful in providing certainty, the cost is a barrier for the average person dabbling in Bitcoin or Ethereum.

Additionally, this statement does not cover the tax treatment of investments in mixed funds. It is common for non-PIE managed funds (for example, overseas funds) to hold investments in both shares and financial arrangements and many queries have arisen from clients about whether the managed fund should be treated like a share in a company, or whether each investment should be handled individually. The answer will be specific to the fund.

Comment

Inland Revenue has been producing guidance on topics of practical and widespread interest over the past few years and this suite of documents is similar.

The draft interpretation statement is helpful and should help flag taxpayers to areas where caution is required. The tax rules around share investments can be complex and Baker Tilly Staples Rodway regularly helps clients such as you navigate these rules.

While Inland Revenue is taking an education-first approach here, we anticipate this will eventually be followed by stricter enforcement action. Inland Revenue is already making queries resulting from global information sharing and is gathering information from local share brokers. Its research and queries will only increase thanks to the recent boost in audit funding. 

If you have any queries about the tax treatment of your investments, please contact your Baker Tilly Staples Rodway advisor.