Investing in shares can be a smart way to grow wealth, but it comes with important tax obligations. Here’s a detailed breakdown of how share investments are taxed under ordinary tax rules in New Zealand.
Who Do the Ordinary Tax Rules Apply To?
Ordinary tax rules cover individual investors who hold shares in:
- New Zealand companies
- Australian companies exempt from FIF (Foreign Investment Fund) rules
- Foreign companies (not exempt from FIF rules) if total attributing interests cost $50,000 or less
These investors may incur a tax liability in New Zealand on:
- Dividends from New Zealand or foreign companies
- Proceeds from selling shares if:
- Shares were acquired with the dominant purpose of disposal
- Shares are part of a share dealing business or profit-making scheme
When Do You Need to File a Tax Return?
Investors are required to file an IR3 individual income tax return if:
- Total non-reportable income exceeds $200 in an income year.
- Foreign dividends are received, requiring the filing of an IR 1261 overseas income summary to claim foreign tax credits.
Taxing Dividend Income
New Zealand Dividends
- Tax is often withheld at source by companies (Resident Withholding Tax, or RWT).
- Investors should:
- Verify amounts pre-populated in their tax returns.
- Pay additional tax if their marginal tax rate exceeds the RWT rate.
Foreign Dividends
- Tax is usually not withheld in New Zealand unless shares are held by a New Zealand resident custodian.
- Investors must:
- Convert foreign dividends to NZD.
- Report this income in their tax return.
- File an IR 1261 form to claim available foreign tax credits.
Taxable Income from Share Sales
When Are Share Sales Taxable?
Share sale proceeds are taxable if:
- Shares were acquired with the dominant purpose of disposal.
- Shares were part of a share dealing business.
- The sale occurred as part of a profit-making undertaking or scheme.
The Dominant Purpose Test
To determine if disposal was the dominant purpose:
- Assess the investor’s stated purpose for buying shares.
- Cross-check with objective factors like:
- The type of shares purchased
- The length of time shares were held
- Circumstances surrounding the purchase and sale
- Patterns of frequent buying and selling
Non-Taxable Share Sales
Shares are generally not taxable if purchased for:
- Dividend income
- Voting rights or other shareholder benefits
- Long-term investment or portfolio diversification, provided disposal was not planned at acquisition.
Importance of Records
Investors should maintain thorough records, including:
- Purchase rationale (investment plans, financial advice)
- Sale rationale (portfolio rebalancing, financial changes)
- Supporting documentation, such as:
- Broker or platform statements
- Dividend yield projections
- Loan agreements if funds were borrowed
What About Share Trading Businesses?
Investors are considered to be running a share dealing business if:
- Activity is large-scale and regular.
- Significant time and capital are invested.
- There’s an intention (or potential) to make a profit.
Even without profit intent, consistent trading on a large scale may qualify as a business. In this case, share sales are taxable.
Deductions and Expenses
Deductible Expenses
Investors may deduct expenses if shares are acquired for sale or as part of a share trading business:
- Cost of shares
- Transaction or advisory fees
- Interest on borrowed funds
- Losses if shares are sold for less than their cost
Dividends-Driven Investments
If shares are not part of a business but were bought with a reasonable expectation of dividends, investors can deduct:
- Interest on borrowed funds
- Certain financial planning fees
Non-Deductible Expenses
If shares were not bought with an expectation of dividends or are not part of a share trading business, no deductions can be claimed.
Other Tax Considerations
Share Lending
- Fees earned from share lending are taxable.
- Additional liabilities may arise if share lending rules do not apply.
Foreign Exchange Gains or Losses
- Gains or losses from foreign currency accounts are taxable if total variable principal debt instruments exceed $50,000.
Key Takeaways for Share Investors
- Understand the Tax Rules: Knowing whether your shares are subject to ordinary tax rules is the first step in compliance.
- Record Everything: Detailed, accurate records help substantiate your investment purposes and reduce disputes with tax authorities.
- Check Your Returns: Always verify pre-filled tax return data, especially for dividends and share sales.
- Know When Sales Are Taxable: Share sales are taxable if they were bought with a dominant purpose of disposal or as part of a profit-making activity.
- Maximise Deductions: Understand what expenses you can claim to reduce your tax liability.
Navigating the taxation of share investments can be complex, but with the right records and understanding of the rules, you can manage your tax obligations confidently. If you’re unsure about your situation, consult a professional to ensure you’re fully compliant and taking advantage of available deductions.
Need help with your tax planning? Contact us for expert guidance tailored to your needs.
For further insights, read this comprehensive guide on share investments and taxation: IS 24/10 – Income tax – Share investments
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