My question relates to capital gains tax.
My understanding is that someone who buys shares (or any other asset) for long-term investment purposes with the aim to collect dividends (or rent etc) is not subject to paying capital gains tax in NZ.
However, if someone is deemed to be a 'trader', they could be liable to capital gains tax.
I have chosen exchange traded funds (share funds traded on the stock exchange) as a core component of my share portfolio.
My question is this: If I participated in a regular payment option (as is available with FONZ), and I bought $100 worth of shares every month, would I be deemed to be a 'trader' because I bought shares 12 times a year, even though I would not be buying and selling 12 times a year?
Also, if I rebalanced my portfolio every quarter (where I bought and sold small numbers of shares in order to rebalance back to my original weightings of the different shares), would I be deemed a 'trader'?
Mary Holm: Here we go again, wading into the murky pool of tax on capital gains.
"Tax is never that easy," comments Deloitte's managing tax partner, Thomas Pippos. And New Zealand's law in this area is particularly confusing.
Your second sentence is broadly speaking right. New Zealand's capital gains tax applies only if you hold shares in companies not based in New Zealand or the Grey List countries, which are Australia, Canada, Germany, Japan, Norway, Spain, the UK or US, says Pippos.
Because of this, many New Zealanders invest only locally or in Grey List countries.
"Watch this space, however," says Pippos. "Dr Cullen is expected to release a discussion document in a matter of weeks seeking to remove the Grey List and extend New Zealand's version of a capital gains tax to all foreign equities!"
The "trader" bit is trickier. Certainly people or companies that trade shares as a business do have to pay tax on their gains - and can deduct their losses.
But if you buy shares "with the dominant purpose of resale" your gains are also taxable, even if you don't trade frequently.
It's not always easy to say when you will be caught by this. Certainly, being in a position to tell Inland Revenue you bought shares for the dividends - or property for the rental income - works better than saying you bought them in the hope of selling at a profit.
And, while nobody will give you a cut-off point, it's better if you hold your investments for a longer period.
On to your questions. Continuous buying of shares won't subject you to tax on gains, says Pippos. But continuous buying and selling would.
What about re-balancing? That depends on the volume of trade, whether you are doing it as a business and so on. Generally, mum and dad investors who buy and sell relatively small numbers of shares to rebalance wouldn't be caught, he says.
I suggest you rebalance less frequently. Unless your weightings have got hugely out of whack, once a year or every two years is often enough.
If you do it more often, you will find yourself selling a share and then buying it back a few months later, incurring trading costs and hassle along the way.
Less frequent rebalancing would also help to keep the IRD at bay.
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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