Paper gains, tax cuts: Why the IRD has direct share-traders under watch
Article written by InvestNow
In typical tight-lipped tax office style, the Inland Revenue Department (IRD) issued a brief statement last October confirming it was keenly observing the stampede of novice retail investors into the direct share-trading game in NZ.
“As new investors are attracted to the market, we will be looking to make sure their tax obligations are clear to them and ensure education is available so investors can work out their own tax situation,” the IRD said.
“We’d also encourage existing investors to check they know their tax obligations.”
‘Encouragement’ is something of a loaded term in the hands of the IRD, which has more than powers of persuasion in its arsenal.
The heightened interest of the IRD in retail share-trading activities has no doubt left many investors anxious – and scrambling to understand their ‘tax obligations’.
Call of (compliance) duties
But what are those tax duties for direct share investors in NZ?
Unfortunately, there is no simple answer: as always, individual circumstances apply.
We can, though, break down the problem into simpler components.
Perhaps the most important distinction lies between investing in offshore equities compared to NZ and (most) Australian listed companies.
With many online avenues opening up to overseas markets, more NZ investors than ever are choosing to hold foreign – especially US – equities directly.
As explained in a previous InvestNow article, local retail investors have some flexibility in how they pay tax on directly held offshore equities: this can lead to complicated choices that may require professional advice.
By contrast, the situation for NZ and Australian shares seems far less complex at first glance.
Typically, investors in direct NZX and ASX equities pay a withholding tax on any dividend income but are free to bank realised capital gains without incurring the wrath of the IRD…
Intention to bill
… although that’s not quite the whole story. Under a long-established law, NZ retail investors may be subject to a tax on profits (at marginal rates) for Australasian equities if they can be shown to have bought the shares with the main ‘intent’ of making a capital gain.
While proving intent is difficult, the IRD does operate an ongoing “compliance programme that looks into share dealing activities”, a spokesperson for the tax department said last year.
According to NZ software firm, Sharesight, the IRD oversight program includes monitoring for individuals who:
- show a pattern of (usually frequent) buying and selling of shares over time;
- invest significant levels of capital in investments, in particular, when borrowing to invest;
- monitor their investment portfolios closely, perhaps using an advanced online trading platform;
- spend a lot of time researching their investments;
- buy high risk shares to flip at a profit;
- buy and sell on ‘revenue’ account instead of capital account.
The Sharesight list is not exhaustive but it suggests many first-time traders – who might be sitting on significant capital gains after a year of raging bull markets – could appear on the IRD watch-list.
ShareMe: where tax and tech meet
Furthermore, it is now easier than ever for the IRD to check up on its citizens, using the same technology that has opened up share markets to the wider population.
The tax department has wide powers to request information, which it has not hesitated to use in the past. In 2016, for instance, the IRD shocked TradeMe users with a compliance data-raid that yielded $3 million in tax revenue. In 2020 the IRD also requested investor information from cryptocurrencies platforms so they could check whether investors had paid tax on profits that they had realised.
An NZ Herald article at the time noted that the government was fine-tuning rules to allow the IRD to collect ‘bulk data’ on taxpayers from a raft of external sources.
The Herald cited a government document, stating: “The availability and usability of large datasets, aided by technology, has greatly improved and is likely to continue.”
“The information used by Inland Revenue is also sourced from databases obtained from financial institutions, including banks, and housing ownership databases and information shared by other countries’ tax agencies,” the article says.
Investors flocking to direct share-trading platforms should, likewise, assume the IRD is carefully scrutinising their activities.
The recent Reddit-led campaign that saw shares in US stock GameStop, among others, surge and fall, has also focused the attention of regulators on social media: the IRD, for instance, could use posts claiming certain stocks are heading ‘to the moon’ as evidence of intent.
Anthony Edmonds, InvestNow founder, said while the rise of interest by New Zealanders in share markets was welcome, investors should understand the risks could include an unexpected tax bill.
“The IRD is clearly interested in the increasing participation of retail investors in direct equity markets,” Edmonds said. “It’s great that many first-time investors are getting experience in owning shares. But there’s also a danger, particularly as investors build substantial direct NZ and Australian share holdings, of a surprise visit from the IRD.”
He said for Kiwis looking for tax certainty, portfolio investment entity (PIE) managed funds probably represent the best route to the share market.
“PIEs that invest in NZ and Australian shares are not taxed on capital gains,” Edmonds said. “They can also include other major tax benefits compared to direct share ownership as well as the ability to tap into the skills of professional investors.”
To date, the IRD has yet to make a public example of any new-entry share traders who may have strayed into taxable territory.
“Direct shares can be good, if you know what you’re doing. But, unless you truly understand the risks and benefits, why take the chance of being the first?” he said.
Paper gains, tax cuts: Why the IRD has direct share-traders under watch
Article written by InvestNow
In typical tight-lipped tax office style, the Inland Revenue Department (IRD) issued a brief statement last October confirming it was keenly observing the stampede of novice retail investors into the direct share-trading game in NZ.
“As new investors are attracted to the market, we will be looking to make sure their tax obligations are clear to them and ensure education is available so investors can work out their own tax situation,” the IRD said.
“We’d also encourage existing investors to check they know their tax obligations.”
‘Encouragement’ is something of a loaded term in the hands of the IRD, which has more than powers of persuasion in its arsenal.
The heightened interest of the IRD in retail share-trading activities has no doubt left many investors anxious – and scrambling to understand their ‘tax obligations’.
Call of (compliance) duties
But what are those tax duties for direct share investors in NZ?
Unfortunately, there is no simple answer: as always, individual circumstances apply.
We can, though, break down the problem into simpler components.
Perhaps the most important distinction lies between investing in offshore equities compared to NZ and (most) Australian listed companies.
With many online avenues opening up to overseas markets, more NZ investors than ever are choosing to hold foreign – especially US – equities directly.
As explained in a previous InvestNow article, local retail investors have some flexibility in how they pay tax on directly held offshore equities: this can lead to complicated choices that may require professional advice.
By contrast, the situation for NZ and Australian shares seems far less complex at first glance.
Typically, investors in direct NZX and ASX equities pay a withholding tax on any dividend income but are free to bank realised capital gains without incurring the wrath of the IRD…
Intention to bill
… although that’s not quite the whole story. Under a long-established law, NZ retail investors may be subject to a tax on profits (at marginal rates) for Australasian equities if they can be shown to have bought the shares with the main ‘intent’ of making a capital gain.
While proving intent is difficult, the IRD does operate an ongoing “compliance programme that looks into share dealing activities”, a spokesperson for the tax department said last year.
According to NZ software firm, Sharesight, the IRD oversight program includes monitoring for individuals who:
- show a pattern of (usually frequent) buying and selling of shares over time;
- invest significant levels of capital in investments, in particular, when borrowing to invest;
- monitor their investment portfolios closely, perhaps using an advanced online trading platform;
- spend a lot of time researching their investments;
- buy high risk shares to flip at a profit;
- buy and sell on ‘revenue’ account instead of capital account.
The Sharesight list is not exhaustive but it suggests many first-time traders – who might be sitting on significant capital gains after a year of raging bull markets – could appear on the IRD watch-list.
ShareMe: where tax and tech meet
Furthermore, it is now easier than ever for the IRD to check up on its citizens, using the same technology that has opened up share markets to the wider population.
The tax department has wide powers to request information, which it has not hesitated to use in the past. In 2016, for instance, the IRD shocked TradeMe users with a compliance data-raid that yielded $3 million in tax revenue. In 2020 the IRD also requested investor information from cryptocurrencies platforms so they could check whether investors had paid tax on profits that they had realised.
An NZ Herald article at the time noted that the government was fine-tuning rules to allow the IRD to collect ‘bulk data’ on taxpayers from a raft of external sources.
The Herald cited a government document, stating: “The availability and usability of large datasets, aided by technology, has greatly improved and is likely to continue.”
“The information used by Inland Revenue is also sourced from databases obtained from financial institutions, including banks, and housing ownership databases and information shared by other countries’ tax agencies,” the article says.
Investors flocking to direct share-trading platforms should, likewise, assume the IRD is carefully scrutinising their activities.
The recent Reddit-led campaign that saw shares in US stock GameStop, among others, surge and fall, has also focused the attention of regulators on social media: the IRD, for instance, could use posts claiming certain stocks are heading ‘to the moon’ as evidence of intent.
Anthony Edmonds, InvestNow founder, said while the rise of interest by New Zealanders in share markets was welcome, investors should understand the risks could include an unexpected tax bill.
“The IRD is clearly interested in the increasing participation of retail investors in direct equity markets,” Edmonds said. “It’s great that many first-time investors are getting experience in owning shares. But there’s also a danger, particularly as investors build substantial direct NZ and Australian share holdings, of a surprise visit from the IRD.”
He said for Kiwis looking for tax certainty, portfolio investment entity (PIE) managed funds probably represent the best route to the share market.
“PIEs that invest in NZ and Australian shares are not taxed on capital gains,” Edmonds said. “They can also include other major tax benefits compared to direct share ownership as well as the ability to tap into the skills of professional investors.”
To date, the IRD has yet to make a public example of any new-entry share traders who may have strayed into taxable territory.
“Direct shares can be good, if you know what you’re doing. But, unless you truly understand the risks and benefits, why take the chance of being the first?” he said.