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At What Point Does A Stock Trader Need To Pay Tax On Profits?

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Contributor:
Mary Holm
Mary Holm

Question:

I have recently begun participating in the NZ stock exchange as an amateur. We are buying and selling. The aim is not to retain stock unless necessary.

My accountant tells me that as a casual player I don't need to pay tax on any earnings on stocks that are traded. Only dividends attract tax.

Is this correct? And if so, at which point will my earnings no longer be classed as "casual"?

Answer:

Mary Holm: I suggest you ask your accountant if she or he will be happy to support you if you are audited - including paying any tax, interest and penalties that you may be found to owe.

The New Zealand law in this area is confusing. "The writer's statement unfortunately indicates perfectly how misunderstood the rules are - including, sadly, by accountants, not taught at University of Auckland Business School I can assure you!" says Craig Elliffe, professor of tax law and policy at - I'll leave you to guess which business school.

The confusion is not helped by the lack of readily available information on Inland Revenue's website, www.ird.govt.nz. Could that lack spring from the department's hesitance to try to write clearly and simply about a topic that is not clear and simple? Don't blame them. They didn't pass the law.

Nevertheless, many people like you need to know whether to pay tax or not. So here's a quick outline of the situation.

While there is no capital gains tax in New Zealand, some capital gains - on shares, property or other assets - are taxed as if they are income.

The gains are taxable - and losses deductible - if you are in the business of trading the assets, or if the profits are business profits. So far, so clear-cut.

But gains are also taxable if they "come from any undertaking entered into or devised for a profit-making purpose", or if you bought the assets "with the clear and dominant purpose" of "selling or otherwise disposing of them".

I would argue that everyone who buys shares or property does so with an eye to selling at a profit. But some people say their main purpose in buying shares is to get the dividends. However, your first paragraph rather counts you out of that group. And the fact that you are a "casual player" won't let you off the hook.

Nevertheless, it seems that many people who buy shares with plans to sell them don't pay tax on their gains - and many do the same with property. As long as they are not audited, they get away with it. And even if they are audited, some seem to talk their way out of trouble. You'll have to decide whether you want to run the risk.

Comments Elliffe: "I think the level of tax avoided in this casual way could be substantial, and that was part of the reason for thinking that a capital gains tax would be fairer and in some respects clearer."

Indeed, talk of the Government's introducing a capital gains tax has increased lately. Whether or not it does, I hope the Government at least clarifies the tax position for you and thousands of others. The difficulty in knowing where you stand is not good enough.

By the way, you didn't ask whether I think frequent share trading is a good idea, but I can't resist saying that it's not. Costs eat into your gains, and chances are you won't be good at picking the right shares anyway. Read on.

 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.      

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