How will my share portfolio be affected by tax and a relationship break-up? – The Ex-Files
Q: I regularly buy shares in overseas companies. I have always thought of myself as an investor rather than a share trader. I have been in a relationship for three years. We split last week. At what point will the IRD treat the profits from my share sales as taxable? Does it depend on how often I trade or why I bought the shares? If my share sales are taxable and I make a loss, can I claim that loss?
A: New Zealand does not have a general capital gains tax, so simply making a profit from selling shares does not automatically mean you have tax to pay. However, profits from selling shares can be taxable depending on why you bought them and how you are investing. Inland Revenue’s current guidance focuses particularly on whether the shares were bought with the dominant purpose of selling them.
Does my intention matter?
Yes. If your main purpose when buying shares was to later sell them, the amount you make from the sale will generally be taxable. You do not need to be a professional share trader for this rule to apply. Even someone who only occasionally buys and sells shares can have taxable income if those shares were originally bought for resale.
On the other hand, if you bought shares mainly as a long-term investment, such as to receive dividends, a later sale will generally not be taxable under the ordinary share-sale rules. Inland Revenue recommends keeping records from the time you purchase shares that show why you bought them.
Am I a share trader?
A separate issue is whether your investing activity has become a business of dealing in shares. There is no simple number of transactions that automatically makes you a share trader. Inland Revenue looks at the overall circumstances and whether your activity has the characteristics of a business.
Frequent buying and selling can therefore be relevant, but it is not the only factor. Your pattern of trading, how organised the activity is and the purpose behind your purchases can all help show whether you are carrying on a share-trading business.
Importantly, you do not have to meet the definition of a share trader before your profits can be taxable. If you bought particular shares mainly to sell them, that can be enough on its own.
What if I make a loss?
If your share sales are taxable, losses on those shares may generally be deductible. For example, Inland Revenue has recognised that where shares are bought with the intention of selling them for a profit, a loss on their sale may be deductible.
This is the other side of having your shares treated on a revenue account. You may have to return your gains as income, but qualifying losses can also reduce your taxable income.
What about overseas shares?
Extra rules can apply if you invest in overseas companies. In particular, New Zealand’s foreign investment fund, or FIF, rules may apply to some foreign investments. For an individual, there is generally an exemption where the total cost of relevant FIF interests does not exceed NZ$50,000, although there are other exemptions and rules that may apply.
This is particularly relevant for New Zealanders investing through platforms that provide easy access to United States and other overseas shares.
What should I do?
Keep clear records showing why you bought each investment. This can include notes about whether you intended to hold the shares for dividends or long-term growth, rather than selling them in the short term. Inland Revenue may look at what you actually did as well as what you say your intention was.
Key Point
There is no simple rule that says a certain number of trades makes you taxable. Your purpose when buying the shares is particularly important, while frequent and organised trading may also indicate that you are carrying on a share-trading business.
It is important that you get from your financial adviser or lawyer full disclosure of the shares that are held at the end of the relationship. The share value at separation would be reduced if tax is payable.
Your partner may request you sign an affidavit in relation to any shares held both in New Zealand and overseas.
Jeremy Sutton’s advice is of a general nature, and he is not responsible for any loss that any reader may suffer from following it. He does not consider your individual situation. Before you make legal decisions, you should always get independent advice from a specialist lawyer.
Catch up on the debates that dominated the week by signing up to our Opinion newsletter – a weekly round-up of our best commentary.