How Are Shares Taxed? - Knowledge Sharing Series
How Are Shares Taxed?
How Are Shares Taxed?
This question keeps coming up as new investors flock to the market. There have been a few different factors behind the surge of interest including, lockdown boredom, new ways to buy shares like Sharesies, Hatch, and Kernel, and a younger generation interested in the share markets.
So there are a bunch of different situations around taxing shares. Each one has some different characteristics and sometimes complex tax rules. The two main situations we see are:
1. Taxed as a share trader.
2. Taxed as a long-term share investor.
These are of course complicated if the shares are a mixture of overseas and New Zealand shares. For the purpose of this short blog post we are going to examine the simplest of the situations we see, a long-term investor investing in New Zealand shares. Tune in to our upcoming articles for how shares are taxed in many different circumstances, all the way up to international share trading, and trading through multiple portfolios.
Long Term New Zealand Investor Example
Let’s start with the simple case of “Joe studying from home through Covid and can’t get out to spend his beer money, so he is putting it into some NZ shares on Sharesies”.
Joe purchased these shares as a long-term investment, he has no sale date in mind, but expects to hold the shares for 5-10 years plus. Joe does expect the shares will increase in value in that time. Joe will buy into this investment weekly or monthly with some of his disposable income. Joe has initially put in $500.00.
So What Forms Of Economic Income Will Joe Receive As An Owner Of The Shares?
Joe may receive two forms of income. He may receive dividend income, where the company pays out some of its earnings to each shareholder. We may also get some of those imputation credits and DWT but let’s put that to one side for now.
Joe’s second economic income comes from the price of the shares purchased increasing or decreasing. If we sell our shares, then we have a realised capital gain or loss. If we still own the share but the market price has moved from our purchase price, then we have an unrealised capital gain.
So Which Of These Economic Earnings Are Taxable Joe?
The key fishhooks here are the ‘intent’ test, and the FIF threshold.
1. The intent test is murky at best, and has produced much case law over the years, however, to keep it simple, if you purchase shares with the clear intent of reselling them for a capital profit then they become “tainted” and the capital gain is taxable on sale. Key indicators of this is frequent trading (both buys and sells) to capitalise on market volatility.
2. The FIF threshold is $50,000. Once you have foreign investments totalling over $50,000 you are required to complete the FIF calculations and return income based on the results.
We can see that Joe doesn’t fall into the intent tests because he is not purchasing the shares for short term gain. He plans to invest long term with periodic buy ins rather than trading any kind of market volatility. Joe also doesn’t fall into the FIF regime because he is not investing in overseas shares, and his total portfolio value is well under $50,000.
Taking this into account, Joe will only be taxed on dividend income received which as we mentioned earlier may even have tax credits paid at source. Investing through Sharesies you will get a nice tidy tax report with your tax details. Not only that but Sharesies will have sent information through to the IRD.
So What Makes It More Complicated?
Well… We can move on to discuss what a dividend looks like, being a share trader, investing in Exchange traded funds, PIE income, investing in Australia, the in’s and out’s of the FIF regime, investing elsewhere in the world, trading in options, and trading in Crypto currency.
All of these things are so much easier and cheaper to do than they were say 5 years ago and are therefore seeing a boom in popularity. Stay tuned for our upcoming articles covering more on the investment space.
How Might We Help?
Once most people move further into investing than Sharesies and investing in solely New Zealand Companies their situation tends to become much more complex at high speed.
We can help by walking you through how you might manage investment risk in terms of asset protection, and how you might split your various investment portfolios for tax purposes. We can also help with all kinds of investment compliance.