Forum Archive Index - December 1999

["Mark Hubbard" <mhubbard@es.co.nz>]

Hi Derek

Your question is actually quite complicated, so here goes:

The first issue is whether or not your capital gain is taxable in the first
instance. This will be taxable if one of the two following circumstances
exists:

1)  You are a share trader;
2) You purchased this particular parcel of shares with the intention to make
a profit.

If neither of these conditions can be proven against you by the IRD then
your capital gain is not taxable. Of course, if you received any dividends
from the shares, then this will form taxable income, however, such a
dividend will carry either imputation credits or dividend withholding tax
credits to the level of 33%, your highest tax level - you can offset such
tax credits against your overall income tax liability (note that if you do
not have enough taxable income then any excess imputation credits will not
be refunded to you, but converted into a loss to carry forward against
future income).

If, however, the IRD can prove either of the above two circumstances, then
you will have to pay income tax on this capital gain. The tax implications
would run as follows:

(This assumes that you purchased and sold the relevant shares in the same
tax year)

For ease lets say that you purchased 1000 shares at $1, with $30 brokerage
on purchase, and again on sale.

For tax purposes, the shares are your trading stock (given either of the
above two circumstances), and are known as 'excepted financial
arrangements'. Unlike other forms of trading stock, excepted financial
arrangements such as shares, MUST be valued at year end at COST (there is
not option any longer to use market value). Thus:

Having made a 25% profit, your shares will have risen from $1 to $1.25. You
are going to sell 800 shares (this will leave you with shares worth $250,
your profit margin).

So:

Your Income:     800 shares sold @ $1.25 = $1,000.00
Closing stock:   200 Share at cost of $1    = $200

Total 'income' = $1,200

Less deductions: Shares purchased this tax year 1000 shares @ $1 = $1,000
Brokerage deductible in year incurred: purchase ($30) + sale ($30)   =  $60

Total deductions = $1,060

Taxable income = $1,200 - $1,060 = $140.

Tax would then be $140 x tax rate of 19.5% = $27.30
(Ignoring rebates).
Or, if on top tax bracket, $140 x 33% = $46.20.


Note that effectively you have to pay tax on the profit on the shares sold
as you sell them and the profit is crystallised.

Hope that clears it up.


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