Share investments by individuals

Inland Revenue (IR) has recently issued a draft interpretation statement titled ‘Income tax – share investments’. The draft Interpretation Statement (IS) provides guidance for individuals who invest in shares, setting out when they may have a tax liability for dividends, share sales, attributing interests in foreign investment funds, share lending arrangements and foreign currency accounts.

While the draft IS focuses on investors who use online investment platforms, the commentary applies equally to other forms of share investment by individuals, such as through brokers.

The document is, in essence, split into two parts – when the ordinary tax rules will apply to the individual, including when they have to return income from dividends and taxable share sales, and when the Foreign Investment Fund (FIF) rules must be applied instead of the ordinary tax rules.

Under ordinary tax rules (which usually apply for shares in New Zealand companies and foreign shares with a total cost of less than $50k), the following amounts received are likely to be taxable:

• dividends paid by New Zealand or foreign companies, to the extent that tax has not been withheld on their behalf in NZ by a NZ company or custodian;
• amounts from selling shares, where the shares were acquired for the dominant purpose of disposal, or were part of a share dealing business or profit-making scheme;
• fees from participating in share lending (and other amounts in situations where the share lending rules do not apply); or,
• foreign exchange gains or losses on foreign currency accounts in situations where the financial arrangements rules apply.

Naturally, the draft IS then proceeds to discuss each of the above four scenarios in more detail, of which the second item is likely to be of interest to most of you (in my humble opinion), which itself is then split into three potential taxing events – acquisition for the dominant purpose of disposal, share dealing businesses and shares being part of a profit-making scheme. However, before you get too excited, I did not find the commentary on these three components saying anything that I’d respectfully suggest the ‘ordinary advisor’ would not already know.

Equally, the commentary on the application of the FIF rules is very brief, in essence just providing an outline of the general principles of the regime. I’d suggest that if you do not already have a good understanding of the FIF regime, then this document is unlikely to educate you further.

The final ten pages or so of the draft IS contains an appendix that provides further analysis and case law surrounding the topics of when an investor has acquired shares for the purpose of disposal, or could be seen to have a share business dealing or profit-making scheme. Certainly, if you are limited for time (who isn’t these days) and do not wish to read all 43 pages, then my recommendation would be that you at least read the appendix.

Two fact sheets also accompany the draft IS – an 11-pager dedicated to the ordinary tax rules and a 7-pager to the FIF rules.

There is a sprinkling of examples throughout the document to illustrate its commentary. If you would like to make a submission on the draft IS, the closing date is 24 September 2024, with the reference PUB00454.

This article from the 'A Week in Review' newsletter was originally published on Monday, August 5th 2024. If you have any questions or would like a second opinion on any national or international tax issues, please get in touch with me at [email protected].

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