The growth of online share trading platforms over recent years has made investing in shares much more accessible for the general population. This is due to the ease of transacting and the ability to invest small amounts for fractional shares.
With so many different considerations that go into making a prudent investment, it can be easy to overlook one of the most important factors that can affect your overall rate of return – that is the tax treatment. After all, your true return from any investment is the after-tax amount received.
Shares can provide income to shareholders in two main ways: through dividends or through capital gain on sale. Inland Revenue has brought the tax treatment of share sales and dividend income into focus with the recent consultation document outlining their view on what is and isn’t taxable. The fact that the draft document is 43 pages long, and the summarised fact sheets are 11 and 7 pages long, reflects the complexity of the issues.
Dividend income
Dividend income is typically taxable, meaning income from dividends forms part of your taxable income. New Zealand dividends will generally either have imputation credits attached, or withholding tax deducted (or a combination of both) so that the dividends are effectively tax paid to 33% for many shareholders.
Overseas dividends are a little more complicated depending on who holds the shares and whether they are subject to the Foreign Investment Funds (FIF) regime. There are also specific rules around claiming a tax credit for taxes deducted overseas. So, if you have foreign investments it is best to do your research or use an accountant to prepare your return.
Selling shares
Determining the tax treatment when you sell shares is less straightforward. The resulting gain may be taxable (or deductible if it is a loss) depending on your circumstances. The sale may be taxable in the following situations:
- If you are in the business of dealing in shares, which generally requires a high level of activity and effort, with an intention to make a profit
- If the shares are acquired as part of a profit making scheme
- If the dominant purpose in acquiring the shares was to sell them at a later date.
The draft document notes that share sales should not be taxable where the dominant purpose of acquiring the shares was to receive dividend income, to receive voting or other rights provided by the shares or for long term investment growth.
As with most things tax related, the onus is on the taxpayer to support the position taken. So, if you are investing in shares you should keep records about your purpose in acquiring share investments and the reasons for any sales if this was not your original intention.
Under information sharing agreements with other tax authorities, Inland Revenue gathers a lot of detail on overseas dividends received and matches these to individual tax returns, following up returns where the dividends do not seem to be returned.
Unlike with real estate, Inland Revenue has not yet focused on monitoring share sales, but it is not hard to envisage this happening in the future, especially with the substantial increase in funding for audit purposes in Budget 2024. If you would like advice on the tax implications of your investment activities, now is the time to contact a tax specialist.
Related: Time to organise your taxes
