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During early April, the number of trades undertaken on the NZX among retail investors per day skyrocketed from around 9000 in late March, to nearly three times that amount days later, outstripping "wholesale" investors in terms of volume of trades (rather than value).
The real winners to emerge out of all this retail market madness are democratised investment platforms, such as Sharesies, which allow direct and affordable (in terms of quantum) access to share markets for everyday ma, pa and the kids.
This trend of direct retail investment has clearly had an impact on NZX, ASX and other share market responses to the Covid-19 economic meltdown, to the extent that at the time of writing, markets have recovered the majority of the Covid-19-driven loss of value, notwithstanding the economic data shows a likely significant negative impact of Covid-19 on future company earnings across the world. This sounds suspiciously close to investment commentary, which of course I am not qualified to give, so lets move on ...
Although new retail investors were unlikely to be thinking about tax consequences when seizing the investment "opportunity" mid-pandemic, the reality is that many will need to consider where they sit from a tax perspective when it comes time to file their tax returns.
The tax outcomes can vary greatly depending on your intention upon acquiring the shares and/or whether you are in the "business" of share trading (by design or by activity).
Generally, New Zealand shares that have been acquired for the purpose of long-term investment will only be subject to tax on dividends, with any associated imputation credits and resident withholding tax attached to said dividends likely meeting your tax liability. Although this means that any gain on sale is essentially a non-taxable capital gain, it does also mean that if the value of your shares tanks and you incur a loss on sale, this is not tax deductible to you. These rules would most likely apply to accumulators of shares over time through a dollar-cost averaging strategy to build a long-term portfolio.
However, different tax rules apply to those who have acquired shares intending to dispose of them, or those who are actively trading in shares. If you have completed a fair few share trades buying and selling — in the past few months, you may wish to talk to your tax adviser to confirm your tax position. The good news (if there is bad news in the markets) is that losses may be tax-deductible, but evidence of intention becomes key.
If you are creating effectively two portfolios (one short-term trading, the other for long-term hold), then separate entities or, at a minimum, accounts would be sensible to be able to clearly delineate between them.
If you have invested in shares in foreign companies, determining what the income you need to return come tax time in relation to these holdings may not be straightforward. Shares in foreign companies may be subject to the Foreign Investment Fund rules. These require an investor to calculate annual income under one of the prescribed FIF methods. The income calculated with these methods that you need to return for tax purposes may be completely different from the dividends you have received, and you may have income without receiving a dividend. These calculations can be complicated, so it is best to consult with your adviser to avoid a headache down the line.
Finally, if you borrowed funds from the bank to take advantage of "cheap" share prices, you should be able be able to deduct the interest expense.
As you will gather, although investing in stocks may seem straightforward at the time of investment, especially with the advent of new, easier-to-use platforms, shares are the same as any other investment asset in that the investor needs to consider the tax impact on a timely basis.
- Scott Mason is a tax specialist and Managing Partner at Findex in Dunedin.