In news that will shock some goldbugs, the Inland Revenue Department (IRD) has proposed that virtually all precious metal investment profits would be taxable.
The proposal, contained in an IRD exposure draft released last week, says precious metal investments would be deemed as “acquired for the purpose of disposal” and therefore subject to income tax.
“The Commissioner considers that the very nature of the asset leads to the conclusion that it was acquired for the purpose of ultimately disposing of it,” the exposure draft says. “Such a commodity does not provide annual returns or income while being held and has use or value only in its ability to be realised.”
Under current law, investors are subject to capital gains on all assets (including investment property and shares held outside portfolio investment entities) if their main intention at purchase is to sell those assets.
“The onus is on the taxpayer to show that they did not acquire the property with the dominant purpose of disposal,” the IRD exposure draft says.
Only investors who could prove they purchased gold (or any asset) with “no clear purpose” may not be subject to tax, according to the IRD.
“The Commissioner considers it unlikely that a taxpayer could satisfactorily show that they purchased gold bullion with no clear purpose in mind,” the exposure draft says.
While some gold investors have been paying tax on gains, it is understood the IRD was concerned others have been avoiding the impost by claiming they purchased gold (and other precious metals) as an inflation hedge or disaster insurance.
Louis Boulanger, the well-known NZ-Canadian gold advocate and consultant, told Investment News NZ (IN NZ) that he “wouldn’t be surprised” if the IRD cracked down on gold tax.
“Governments all over the world are looking to control gold,” Boulanger said.
He supported the view that gold bought as a portfolio hedge should be tax-free, likening the transaction to purchasing currency.
“Say you bought 1000 Euros to spend while on holiday in Europe but you left it behind in a draw,” Boulanger says. “If you found it months later and it was worth more [in NZ dollar terms] than you paid for it, would that be taxable when you sold it?”
However, the IRD proposal specifically dimisses the notion that buying gold to hedge other portfolio risks exempts investors from tax.
“That gold bullion may be described as an investment, or acquired to provide a hedge, does not suggest that it was not acquired for the purpose of disposal,” the IRD paper says. “Indeed, gold bullion only has value as an investment or hedge because it will ultimately be disposed of.”
On the flipside, the IRD says losses on the sale of gold and other precious metals bought for investment purposes would be deductible.
While the IRD exposure draft may have application outside its precious metal scope, the proposal appears to offer some relief for direct share investors.
The exposure draft says gold “could be contrasted with other investments, such as shares, that may be acquired for purposes other than their ultimate disposal”.
“For example, shares may be acquired for a dividend stream or, even if the shares provide no yield, for any voting rights they confer,” the IRD says.
One NZ manager who had sighted the IRD ruling says direct share investors – including discretionary investment management service (DIMS) providers – may want to revisit scheme and marketing documents in light of the gold paper.
For example, the IRD ruling may prompt DIMS providers to “check all client material only references intentions like receiving dividends, or exercising their voting rights as the reason for buying shares”, the manager said.
According to the IRD exposure draft, its tax proposal applies to “gold bullion, or gold units or certificates that do not pay interest or dividends” as well as other precious metal investments.
However, purchase of gold and other precious metals for business purposes (such as jewelry or a bullion trading exchange) would not be subject to the same investment tax treatment.
Gold purchased in the form of “jewelry, antiques, ornaments, collectables” may also be exempt from tax on sale as long as the items were not bought for “the dominant purpose of disposal”.
The IRD says taxpayers must consider the “totality of the circumstances” when such an exemption may be valid.
“These include: the nature of the asset, the taxpayer’s occupation, the circumstances of the purchase, the number of similar transactions, the length of time the property was held, and the circumstances of the use and disposal of the asset,” the IRD paper says.
The exposure draft – reference PUB00227 – is open for comment until April 16 this year.