When do I need to pay tax on my share investments?

By Joe Sothcott & Phillip Claridge

Investing in shares has never been more accessible. With the rise of low-cost online investment platforms globally, billions of dollars have flowed into markets as an unprecedented number of investors have taken the plunge into the world of investing.

To assist taxpayers who invest in shares, Inland Revenue has published a draft interpretation statement on this issue for consultation. While focused on individuals who use online share investment platforms, the analysis equally applies to individuals who invest in shares in any other manner (i.e., via a broker).

The statement is not intended to apply to investments in New Zealand managed funds (like KiwiSaver), as those vehicles are typically taxed under the portfolio investment entity (PIE) rules. Shares in foreign companies taxed under the Foreign Investment Fund (FIF) rules are also only covered briefly, however the statement is helpful for investors whose foreign shares are not taxed under the FIF regime.

So, does Inland Revenue say I have to pay tax?

Overall, the draft commentary is unsurprising. Unfortunately, this means the answer is “it depends”. In essence, individuals who invest in New Zealand companies or foreign companies (not taxed under the FIF rules) have taxable income in the following circumstances:

• When they receive dividends; and

• When they sell shares where the shares were acquired for the dominant purpose of disposal or were part of a share dealing business or profit-making scheme.
  

Let’s dig into this further.

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 companies, tax is typically withheld and paid on behalf of the investor, although sometimes a ‘top-up’ is needed in your own return. This requires looking at what has been pre-populated in your tax return by Inland Revenue or checking with your share platform/broker. You may have a tax liability in your return if tax has not been withheld, or the amount withheld (when combined with any imputation credits) is less than your tax liability in relation to the dividend.

For dividends from foreign companies, usually tax will have been withheld in the other country. Some investment platforms will also deduct New Zealand tax. When completing your tax return, you can claim a credit for New Zealand tax withheld. A ‘foreign tax credit’ may also be available for the foreign tax withheld. Although Inland Revenue has tried to summarise the rules for foreign dividends in the statement they can be complicated (particularly the treatment of foreign tax credits) and you should seek advice if you are unsure.

Interestingly, Inland Revenue does not comment on dividends from New Zealand exchange traded funds that are ‘Listed PIEs’ for tax purposes. Individuals don’t need to include these dividends in their tax return. However, you can choose to include the ‘fully imputed’ portion in order to claim imputation credits. Usually, the fully imputed portion (sometimes referred to as the ‘taxable portion’) is identified in the dividend statements or investment platform statements.

Selling shares

When investors sell shares, any gains they make are taxable in three circumstances:

1. If the investor is in the business of share dealing. This is a high bar, and generally requires an investor undertaking buying and selling activity at a large scale, with regular trading activity, a systematic approach, a significant amount of time and money invested, and with an intention to make profit.
2. The acquired shares are part of a profit-making undertaking or scheme. The draft statement indicates it would be unusual for this to apply in the context of widely held shares acquired through platforms or brokers.
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.
   

It’s worth having a closer look at number 3, as this is the circumstance most likely to catch out investors.

Shares acquired for the purpose of disposal

When evaluating an investors' purpose, the factors Inland Revenue considers relevant 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.
  

What does this mean practically? Inland Revenue emphasises there are no bright line tests, although shares only held for a few months are likely to be considered purchased for resale. Situations where shares have been acquired to sell later to fund a specific goal - such as a housing deposit - would also be taxable.

The key is the word dominant. When acquiring shares, a taxpayer may have several purposes (or no particular purpose at all), but the onus is on the taxpayer to prove that the disposal of the shares was not the dominant purpose of acquiring the shares. Note, a taxpayer only has to prove that disposal was not their dominant purpose, they do not have to prove an alternative dominant purpose.

The disposal will not be taxable if the shares were acquired with the dominant purpose of, for example:

• Receiving dividend income

• Receiving voting interests or other rights provided by shares

• Long-term investing, growth in assets or portfolio diversification

Investors should, therefore, keep records about the purpose of their share purchases. Inland Revenue recommends that if shares were purchased for different reasons, these should be held in separate accounts.

When share income is taxable, a deduction can be claimed for the cost of acquiring the shares as well as other costs, such as platform or broker fees. If the cost of acquiring the shares is more than the sale price, a loss can be claimed if the shares were purchased with the dominant purpose of disposal or as part of a share dealing business.

FIF rules

Although not a focus, the statement briefly discusses the FIF rules. The rules usually apply to taxpayers who, at any time in the year, own shares in foreign companies costing more than $50,000 in total. This means that tax will need to be calculated using an acceptable FIF method. For most taxpayers, this will be the fair dividend rate (FDR) or comparative value (CV) method. Only income calculated under the relevant FIF method needs to be included in a taxpayers return. Other amounts (for example dividends) are not directly taxed.

Interests in some foreign companies, including many ASX listed Australian companies, are exempt from the FIF rules. If you think you may be subject to the FIF rules, we recommend seeking specialist tax advice.

Deloitte’s view

The fact that Inland Revenue has decided to publish this draft statement indicates that increased audit activity in this area is likely. With increased funding and a new compliance focus, investors should anticipate that Inland Revenue could come asking if it seems that shares have been purchased with the dominant purpose of disposal and then sold.

Investors should be aware that Inland Revenue receives a significant amount of information directly from financial institutions under both New Zealand’s local investment income reporting rules, and international information sharing arrangements. In addition, the Commissioner of Inland Revenue has wide reaching powers to obtain additional information directly from financial institutions. When combined with advanced data analytics, this may make your activities more visible than you expect.

The draft statement, along with two fact sheets on dividends and taxable share sales and whether the FIF rules apply, are open for consultation until 24 September 2024.