I am often asked how much activity is required for someone to be taxed as a share trader.
Often the question is asked when someone has made a loss rather than a gain!
The comments below apply to all New Zealand and Australian listed equities. Generally, all other equities are subject to the foreign investment fund (FIF) regime and are taxed solely under that regime. Typically, an investor with FIF investments will be subject to the so-called Fair Dividend Rate (FDR) regime. The FDR regime applies where the total cost of the foreign equities, including brokerage, exceeds $50,000.
The rules and case law relating to what constitutes share trading are not straight-forward. The relevant legislation and case law is that gains made from any of the following scenarios are taxable:
The investor regularly buys and sells shares, though not all shares are acquired with the purpose of resale;
The shares were acquired with the dominant purpose of resale; and
The investor acquires shares as part of a scheme or undertaking to make a profit.
Typically Inland Revenue and the courts would look at:
The number of transactions;
How long shares are held; and
Whether there was a pattern of acquisition and sale.
Case law strongly suggests that relatively few transactions are required to constitute a business.
Some investors keep long-term investments and share trading activities separate by either using separate accounts for trading and long-term investment holdings, or separate entities such as a company or trust to hold the different portfolios.
Stagging is the practice of buying initial public offerings at the offering price and then reselling them once trading has begun, often for a substantial profit. If you intended to stag shares from the Genesis Energy share offer, the gains will be taxable income as you will have acquired the shares with the dominant purpose of resale. Again, the length of time held and whether there is a pattern of such behaviour are key factors that Inland Revenue and the courts would look at.
The onus is on the taxpayer to show that any gains are not from trading, or that losses are from trading, rather than on Inland Revenue. Of course, Inland Revenue has the considerable benefit of hindsight to look at a history of transactions when determining purpose.
In the early 1990's the Report of the McLeod Committee into the tax system recommended that taxpayers should be allowed to elect to nominate each share purchase as being on trading account or for long-term investment. That recommendation was rejected. I believe that investors should have the right to make such an election, subject to appropriate guidelines.
* Murray McClennan is the principal of Tax Central Limited, a specialist tax advisory firm. He can be contacted at firstname.lastname@example.org. The above comments are of a general nature only and are not a substitute for specific advice.
- The Southland Times