Forum Archive Index - July 2000

["Murray McLean" <murray@fmb.co.nz>]

WHEN IS AN INVESTOR IN BUSINESS?


As this seems to one of the current topics the following is a brief summary
of the criteria as to whether a share trader is in bisiness or not as per
the word on the New Zealand Inland Revenue Department. (Reference-  Bulletin
Volume Twelve, No. 5, May 2000)

A share trader can only claim expenses incurred on share trading if he is
deemed to be in the business of share trading, and similarly can claim
losses or should declare profits.

One correction to an email of Jesse earlier in the day-   the depreciation
rate for computers is 40%DV or 30%SL.

Section OB1 of the Income Tax Act 1994 defines business to include "any
profession, trade, manufacture, or undertaking carried on for pecuniary
profit"

Whether a taxpayer is in the business of investing is dependant on that
taxpayer's situation.   The leading  "business" case in New Zealand is
Grieve v CIR (1989)   In that case the judge set out  the factors relevant
to the inquiry as to whether a taxpayer is in business:
**  the nature of the taxpayer's activities.
**  the period over which the taxpayer engages in the activity, and
**  the scope of the taxpayer's operations, and
**  the volume of transactions undertaken, and
**  the committment of time, money and effort by the taxpayer, and
**  the pattern of activity,and
**  the financial results achieved by the activity.

In determining whether income earned from investing should be declared in
tax returns it will depend if the investor is:
**   a passive investor.
**  a speculative investor.
**  in the business of investing.

A passive investor is a person whose primary aim is to derive dividend and
interest income from a secure investment portfolio.   There may be a
secondary hope or possibility that the investments will provide long-term
capital appreciation.   A passive investor will make changes to the
investment portfolio from time to time to achieve this aim.   Some investors
may also be actively involved in monitoring their investment portfolios (or
engage an investment advisor to do this for them). to ensure that the
primary aim of maximising dividend and interest yiels is maintained.   The
passive investor will not buy or sell investments for short term gain.   The
passive investor is not regarded to be in business as an investor.

A speculative investor is someone who either acquires an investment with the
intention of selling it, or carries out an undertaking or scheme, involving
the investment, entered into or devised for the purpose of making a profit.
Investors are not speculative investors simply because they would like to
see their capital increase, or that they may sell their investment if the
capital increases.   Most passive investors fall within that description.
It is the person's dominant purpose that is important in this distinction.
An investor may be a speculative investor in relation to one investment, and
not in relation to another.   Profits derived or losses incurred in
speculative investment activity are regarded as Assessable Income.

An investor who is fully in the business of investing should declare profits
derived or losses incurred in that activity under Section CD 4 and expenses
deductible under Section BD 2 of the Income Tax Act 1994.


THIS ARTICLE HAS BEEN COMPILED BY MURRAY MCLEAN OF FINANCIAL MANAGEMENT
BUREAU, A HOME BASED BUSINESS IN CLIVE, HAWKES BAY WHICH PREPARES TAX
RETURNS AND PROVIDES BUSINESS FINANCIAL MANAGEMENT SEVICES TO SMALL
BUSINESS, SELF EMPLOYED PERSONS AND RENTAL PROPERTY INVESTORS.   CHECK OUT
THE SERVICES IT CAN OFFER AND SOME VALUABLE TAX AND BUSINESS INFORMATION AND
USEFUL WEB SITE BUSINESS LINKS ON ITS OWN WEBSITES www.fmb.co.nz and
www.taxreturnz.co.nz.   CONTACT BY EMAIL AT murray@taxreturnz.co.nz  .
CLIENTS COME FROM THROUGHOUT NEW ZEALAND AND OVERSEAS.   DOCUMENTATION
REQUIRED TO PREPARE YOUR TAX RETURNS CAN BE DOWNLOADED FROM THE ABOVE
WEBSITES.


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For taxation and financial matters visit Web Site  www.fmb.co.nz or
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