Investing in shares is a little like being at the races.
I don't so much mean the nature of the punt, but rather that
people tend to only recount their successes. Any losses seem
to disappear into the misty ether of yesterday. Having
enjoyed a little win among my more frequent (and mostly
uncrystallised) losses, it got me reflecting on the tax
consequences of such.
Generally speaking, the gains (or losses) on the sale of
shares can hit the tax net in two main ways.
The first is where you have acquired those shares with the
intention of selling them. An example of this maybe a
situation where you subscribe for shares in one of the
Government's privatisation sell downs (e.g. Mighty River
Power) with a view that you can ''stag'' them: that is, you
hope to sell them quickly for a gain. This could apply to any
share, new issue or not.
If you have such an intention, then when you sell them, the
sale proceeds will be on revenue account (which is code for
taxable). You, of course, can claim a deduction for the cost,
which will either generate a taxable profit or a claimable
Where it gets more complicated is when the IRD asks you to
prove your intention at the date of acquisition (normally
asked with a view to deny a loss or perhaps drag a profit
into the tax net). Timing of transactions is indicative of
intent (e.g. if you sold within a week, that may indicate an
intent to sell) but the best evidence is something more, such
as a note in your diary, a file-noted conversation with your
broker, or similar.
This applies both ways - demonstrating a long-term intent
when, in fact, you sold the share within a short timeframe
due to changing circumstances for a gain (and you are arguing
it should be tax-free), or trying to claim a loss on a
particular share. The onus is on you to prove whatever the
IRD believes is incorrect, not on them to prove it is
correct, bearing in mind that they always have the benefit of
hindsight (including the ability to electronically access
details of all share transactions).
The other main reason share transactions fall into the tax
net is where that share investment is part of a share trading
business/undertaking. In that case, the profit or loss will
form part of the overall calculation of the share trading
business' income, just like the sale of bread forms part of a
corner dairy's income.
The main point of contention in this instance is whether
there is a business at all. We have seen many arguments with
IRD where it has argued a business exists on what we would
consider a relatively few transactions/low time applied where
there is an overall profit. Interestingly, in recent years,
the IRD has been actively arguing the counter position for
some taxpayers, whereby it feels there is no evidence of a
business, and thus, losses are not claimable.
In that sense, it seems to apply a much higher standard of
''what is a business'', including, in some instances, carving
up the types of shares into smaller groupings (e.g. NZ v
overseas shares), so as to demonstrate that, when isolated,
neither activity meets the business tests.
Irrespective of the veracity of these types of distinctions,
it suggests that in the margins there is still room for
debate as to whether those gains/losses on shares should be
taxable/claimable, and taxpayers should take care, noting
that the IRD is both active in this area (e.g. it habitually
examines share trading activities post-floats) and has the
dual advantages of hindsight and superior resources.
- Scott Mason is the managing principal of tax advisory for
Crowe Horwath NZ.