Platform share-jockeys have been issued new draft riding instructions by the Inland Revenue Department (IRD), putting off-track online traders on notice of shock tax imposts.
Under the draft ‘interpretation statement’ published last week, the IRD says while online share-trading is “becoming increasingly common” in NZ, many investors may not be “aware of their tax obligations”.
“Most people understand that share traders or dealers who buy shares for resale need to pay tax, but it is not so well understood that people who make only occasional sales also have to pay tax, if those shares were bought for the purpose of resale,” the IRD says.
In particular, the guide says share-traders must take care to document the “dominant purpose” for their purchases or risk a surprise tax on any realised gains.
For example, if traders can prove they bought shares primarily to capture dividends, receive voting rights or as part of a long-term diversified portfolio then any sale profits will be tax-free regardless of when such stock is sold.
“An investor may have one purpose, more than one purpose, or no particular purpose for buying shares,” the draft guide says. “The onus is on the investor to prove whether their dominant purpose for buying shares was to dispose of them.”
But while a well-crafted file-note might offer some proof-of-purpose, the IRD warns it would also consider other factors when assessing tax liabilities of share-traders.
“When deciding what an investor’s dominant purpose was at the time they acquired shares, what they say their purpose was is tested against a combination of objective factors,” the guidance says. “This includes the nature of the asset (that is, the type of shares purchased and what rights they give the holder), the length of time the shares were held, the circumstances of the purchase and disposal of the shares, and whether there is a pattern of purchases and sales suggesting there was a dominant purpose of sale.
“… It may also involve considering whether the particular shares acquired are high growth or otherwise generally speculative in nature.”
The IRD guide also clarifies how investors can apply the foreign investment fund (FIF) rules to offshore shares.
“Inland Revenue is aware that there is some confusion about when foreign investment fund (FIF) rules apply, and when ordinary tax rules apply.”
The FIF regime, which imposes a tax based on an assumed annual gain, applies to directly held overseas equities valued at $50,000 or more – although ‘de minimis’ investors can opt-in to the treatment.
Possibly, the draft guidance foreshadows more rigorous IRD oversight of the growing online share-trading community in NZ but the core principle of purchase ‘intent’ remains a high barrier for enforcement.
And while the guide mainly targets modern online-based stock-jocks, “whether the platforms are based in New Zealand or offshore”, the IRD says the “principles in the statement would also apply more widely to individuals using other forms of share investment (such as brokers)”.
However, the statement “does not apply to managed funds, kiwisaver, non-individuals or illiquid investments in closely held companies”, the tax department says.
Submissions on the draft guidance are due by September 24.