When do I need to pay tax on my share investments? Inland Revenue’s final guidance (almost) answers all the questions.

By Joe Sothcott & Amy Sexton

As we wound down for the summer holidays last year, Inland Revenue delivered an early Christmas present when it published the finalised share investment interpretation statement and two handy fact sheets. The final guidance document has had a few changes to the draft guidance we discussed in our September 2024 Tax Alert article. The advent of online platforms which makes share investment easy has increased the proportion of the population who are investing in shares. The new guidance should be a useful reference point for investors, particularly for those just beginning to invest in shares who don’t realise that buying and selling shares can have tax implications.

First, a recap of the long-standing share investment rules:

An individual investing in the shares of both New Zealand and foreign companies (when not subject to the Foreign Investment Fund or Controlled Foreign Company rules) has taxable income in two circumstances:

• When they receive dividends; and
• On the sale of shares that were acquired for the dominant purpose of disposal or were part of a share dealing business or profit-making scheme.

Dividends

The starting point is that dividends from both New Zealand and foreign companies are taxable in New Zealand. However, if the FIF rules apply to the shareholding, or you are a ‘transitional resident’, dividends from foreign companies usually aren’t taxable to you.

For New Zealand company dividends, tax is typically withheld and paid on behalf of the investor. Taxpayers should still check what has been pre-populated in their tax return in case they need to ‘top-up’ the tax withheld. There may be a tax liability in the tax return if tax has not been withheld or the amount withheld (when combined with imputation credits) is less than the taxpayers tax liability in relation to the dividend.

For foreign company dividends, tax is usually withheld by the other country, and occasionally, New Zealand tax is withheld (depending on the investment platform). A tax credit can be claimed for any New Zealand tax withheld, and a foreign tax credit may be available for foreign tax withheld. The rules for foreign dividends and foreign tax credits can be difficult and we recommend seeking advice if you are unsure.

Selling shares

A gain from the sale of shares is taxable in three circumstances:

1. If the investor is in the business of share dealing.
2. If the acquired shares are part of a profit-making undertaking or scheme. 
3. If at the time the investor acquired the shares, the dominant purpose of acquiring the shares was to dispose of them at a later date.

In our September 2024 article, we cover these three scenarios in greater detail. However, what most investors need to be aware of is circumstance three. If at the time the shares were purchased the dominant purpose for purchasing the sales was to later dispose of them (by sale or otherwise), any gain on the share sale will be taxable. Factors that Inland Revenue consider relevant in establishing if there is a dominant purpose to dispose include:

• The type of share purchased and what rights they give the holders,
• The length of time the shares were held before disposal,
• The circumstances of the purchase and disposal, and
• Whether there is a pattern of purchases and sales suggesting a dominant purpose of sale.

There are no strict brightline tests to determine dominant purpose, but situations where shares are held for only a short time could be taxable. Another common disposal situation that would be taxable would be when shares have been purchased to sell later to fund a specific goal (like a house deposit).

Examples of when disposal will not be taxable would be if the shares were acquired with the dominant purpose of:

• Receiving dividend income,
• Receiving voting interests or other rights provided by shares, or
• Long-term investing, growth in assets or portfolio diversification.

Taxpayers should remember:

• Whilst a taxpayer may have several purposes (or no particular purpose at all) when buying shares, the onus is on the taxpayer to prove that the disposal of the shares was not the dominant purpose of acquiring the shares.
• Investors should keep recordings of the purpose of their purchases and keep shares purchased for different reasons in separate accounts.
• If share income is taxable, deductions can be claimed for the cost of acquiring the shares and other related costs like platform or broker fees. If the cost of acquiring the shares is more than the sale price, the loss can be claimed if the shares were purchased with the dominant purpose of disposal or as part of a share dealing business.

What has changed from the draft guidance?

Most notable is not what has been added but rather what has been removed. The final guidance document has removed two sections on share lending and foreign currency accounts. These are two complex areas of tax that warrant guidance documents of their own. As such, we can see why Inland Revenue have chosen to remove them to avoid confusing readers.

A flow diagram has been added to assist with determining which tax rules may apply to individual share investors.

One of the more useful additions is the new section on the interaction between share sales and investment plans. Investment plans are strategies an investor uses when choosing where to invest their money. These plans are based on each investor’s personal goals and can consider things such as investment objectives, risk appetite, and types of investment. These plans sometimes include asset allocations for each class, expressed as a percentage of the overall portfolio or risk limits (e.g. an investor might choose to allocate 10% of their total portfolio to bonds).

To ensure the investment plan is stuck to in situations where one type of asset increases or decreases in value, assets can be reallocated. A share sale in these situations may not be taxable when there is a long-term investment plan. It is important to note that this rule does not apply to the portfolio but to the purchase and sale of individual shares. So any shares within an investment plan purchased with the dominant purpose of sale remain taxable. However, sales to rebalance a portfolio to align with an investment plan's asset allocation or risk tolerance will generally not be taxable. As with all things tax, this is fact specific.

The final guidance applies to New Zealand tax resident individuals who invest in shares. It does not apply to investors who acquire interests in managed funds, KiwiSaver or portfolio investment entities.

If you have any questions or would like assistance with the tax obligations associated with your share portfolio, please contact your usual Deloitte advisor.