Stock market investment
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As we approach the end of the financial year, the question of how to report income from the purchase and sale of shares is frequently asked when we file individual income tax returns. Whether or not capital gains are taxable is another point that is often raised.
So, let’s start with this part of our topic today: How do I file a tax return for buying and selling shares?
Investment or trading?
We know that capital gains tax (CGT) is not widely applied in New Zealand and the government has rejected proposals for capital gains tax in 2019. However, capital gains tax still exists in some form in specific areas. Such as the bright-line test in the property market, and today we need to discuss buying and selling in the stock market. Firstly, we need to start by defining whether the purchase or sale of shares is an investment or trading based on the following points.
- The buying and selling shares activities are in a business context
- The intention of purchase of shares if for the purpose of making a future profit from the sale of the shares
- The activities of purchase or sale of shares under a stock exchange business or company
If any of the three points above are met, the purchase or sale of shares is a trading activity (trader) and the dividend component, and the capital gains component are taxable. If the purpose of purchase and holding the shares for a long period of time is to earn dividends, then it is a share investment (Investor) and only the dividends are taxable.
Therefore, there is no capital gains tax in New Zealand, but the capital gains portion of shares may be taxable.
How do I file tax under the FIFs (Foreign Investment Funds) rules?
If you are investing in an overseas stock market (US, Hong Kong, shares etc), you will need to file tax under the FIFs rules once you reach the NZD$50,000 investment threshold (note: most shares on the ASX Australian stock market are exempt from FIFs rules). Under the FIFs rules you will be required to file a tax return under the FIFs tax rules regardless of whether you make a profit.
N$50,000 threshold definition: NZD$50,000 is specifically defined as the maximum amount of investment costs for holding shares in a company in a year. Example: If Mr. Martin invested in the US stock ABC Ltd. and bought NZD$30,000 shares in April and sold all the shares it in May. In June, he bought another NZD$40,000 in ABC Ltd. Then Mr. Martin’s maximum investment cost is NZD$40,000, which does not reach the threshold of NZD$50,000. If Mr. Martin invested in the US stock ABC Ltd. and bought NZD$30,000 in April and bought another NZD$30,000 in May, then Mr. Martin’s maximum investment cost would be NZD$60,000, reaching the threshold of NZD$50,000, and he would need to file a tax return according to the FIFs rules.
Calculation methods for tax returns under the FIFs tax rules
There are five specific calculation methods, here we only briefly cite two of the commonly used calculation methods for your reference.
1: Fair Dividend Rate (FDR)
0.05 multiplied by opening market value (the total of the market values of the attributing interests in FIFs held at the beginning of the income year) plus quick sale adjustment (extra amount calculated when a person buys and sells an attributing interest in the same FIF in the same income year and makes a gain)
FDR cannot be used if the attributing interest is a non-ordinary share, or if the person uses CV for another attributing interest that is a share in a foreign company if FDR would be allowed. If it is not possible to determine the opening market value except by an independent valuation, the person may use the cost method.
2: Comparative Value Method
(Closing market value plus gains) minus (opening market value plus costs) Gains are amounts received from holding (includes dividends) or disposing of the attributing interest and foreign withholding tax or other credits. Costs include expenditure on buying attributing interests plus foreign income tax a person is liable to pay in another country.
If the attributing interest is a share in a foreign company, its use is limited to natural persons, eligible trustees (type B), non-ordinary shares and share users under a returning share transfer. It must be used if the attributing interest is a non-ordinary share unless it is not practical to determine the market value at the end of the year.
Tax advice.
- Potentially, exclude the portion that has already been paid tax overseas from your tax return.
- If you are under the FIFs rules, you do not need to file a separate tax return for the dividends, but you can still use the tax credit included in the dividends to offset your income tax.
- Hold shares under trust to gain asset protection and tax flexibility.