Does your new share market habit come with a tax bill?

Tax Alert - November 2020

There has been a noticeable increase in the popularity of investing in the share market recently, largely due to increased accessibility enabled by app-based investing, the ability to invest small amounts at a time and the diminishing returns from bank deposits.

New investors in the share market may not be aware of the tax implications of such investing. Casual investors who are only investing on a smaller scale may assume they are not required to pay tax on any profits. The decision of the New Zealand government not to implement a capital gains tax may also give some investors a false sense of security. Outside of a capital gains tax however, there are provisions in New Zealand’s income tax legislation which can tax profits made on the disposal of shares.

Profits made when shares are sold could be taxable at the taxpayer’s marginal tax rate if the taxpayer:

• acquired the shares for the purposes of disposal; 
• entered into an undertaking or scheme to make a profit with the shares purchased; or
• is in the business of dealing in shares.

It is important to note that whether or not a person is in the business of dealing in shares is inferred from their conduct, and will depend on a number of factors, including the frequency and volume of transactions, and the pattern of behaviour over a period of time. Part-time share traders are not immune – the same rules apply. If taxpayers are caught under any of these scenarios, any profits made from selling shares would be taxable.

The intention of an investor takes on particular importance if shares are acquired when the investment is in a growth phase, and there is no short- or even medium-term prospect of a dividend being paid. In this situation, how the taxpayer intends to make a profit from the investment should be documented.

The risk of Inland Revenue taking an interest in your share trading activity increases along with the volume of shares being bought and sold, the level of profit being made, and the speed of turnover. Inland Revenue have very broad information gathering powers at their disposal, enabling them to look further into share trading history and records. This extends to asking the people who facilitate share trades to provide information about their customers.

If you already have, or are thinking about entering the share market, we recommend that you document your intention (for example, by writing a business plan) when acquiring the shares and retain this information along with your normal business records. Similar issues arise when buying and selling cryptoassets, as covered in our article in this edition of Tax Alert.

If you think any of the above may apply to you and would like to discuss in more detail, please get in touch with your Deloitte advisor.