Forum Archive Index - October 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi graham,

I see no-one has replied to your question so I will give it a go. 
 
But be warned I am not a tax accountant, nor do I work for inland 
revenue.  I speak from personal experience only so to some extent the 
information I give you is worth what you paid for it.  You should 
double check it yourself.
>
> 
>Can anyone assist me with Tax info?
>I have share options recently given to me by company, a NZ
>registered company with Head office in Asia. I can exercise my
>options any time of year. I am trying to confirm the tax
>implications relating to the share options. I have identified 3 so
>far.. 
>
>
>1-I pay tax on the taxable benefit at the time I exercise my
> option.(39%) 
>2- I pay tax on unrealised capital gains. ie a Tax on
> the difference between the exercise price and the value of the shares
> at the end of the Tax year (end of March). This is a result of my
> company being Asian based (not USA, Canada or Japan) 
>3- I pay tax on
> the profit at the end. (39% of the total profit)
> 
>Is there any further information relating to item 2 (eg. how much
>this Tax is? Is the Tax calculation always done on the last day of
>March etc) Is there any software package available in NZ to help me
>work out my total loss to Tax- as it seems substantial
>
> 
I don't think you have given sufficient information to enable me to 
be sure of answering your question.   Generally, with options issued 
by a New Zealand company for a New Zealand Company (like shares) 
there should be no tax payable at all unless you obtained them with 
the specific intent of playing the market to make a profit on their 
sale.  But you got yours as a long term investment - right?

The exception to this rule is if the options were granted to you as 
part of a salary package, and reading between the lines this may be 
the case.  You didn't say if you paid anything (even a nominal 
amount) for your options.  I am guessing that you didn't.  If this is 
the case, then I guess you could argue that you haven't received any 
benefit from them until you "cash them in".  However I am not sure if 
this is correct if you are able to sell your options,  as options,  
on the open market.  As long as the value of the shares is above your 
excise price my guess is that our inland revenue department would  
regard you as being "in the money" now and so they will require you 
to file tax forms covering your options, specifically because they 
are 'foreign' options.

When you "cash them in" or "take up" your options then the 
benefit to you becomes the quoted share price, less the price you 
paid to covert the option to a head share (excise price).  The tax 
rate you will pay is only 39% if you are on the highest marginal tax 
rate, although I am taking a guess that you are.

Moving on to your point /2/, it would seem the shares in the company 
that you are eventually going to get are classified as a "Foreign 
Investment Fund" (being Asian based, but not Japanese) and come under 
our Inland Revenue departments FIF regieme.  

You only need to worry about this if the total of all your 'foreign' 
investments (foreign excludes Australia, the UK, the USA, Canada, 
Japan, Germany and Norway IIRC)  have a market value at March 31st 
of over $NZ50,000.    In other words if you had your options and, for 
example, shares in Brierley Investments, you would need to total the 
value of both up to see if you breached the $NZ50,000 threshold.

If this is the case you need to get onto that confounded IRD phone 
system and get Inland Revenue to send you a "IR-4H CV" form.  CV 
stand for the 'Comparative Value' method of calculating the FIF 
bit of your tax bill.   Essentially you are correct, in that your 
unrealised capital gains are taxable.  The unrealised capital gain 
for the year is added to your income for the year.  The unrealised 
capital gain is calculated in New Zealand dollars, based on the 
prevailing exchange rates at the start and the end of the tax year 
(March 31st). 

You ask how much this tax is.  The tax is paid at your marginal tax 
rate, which I am guessing is 39%.  It is not an extra tax.  It is 
treated as part of your income tax, as New Zealand does not have a 
separate capital gains tax.  The system also works in reverse so that 
if in one year the total amount of your deemed FIF funds goes down, 
you effectively get tax relief!  Is there a software package to do 
all this?   Well, in a manner of speaking, yes.  It is called your 
brain, an IR-4H CV form and a pencil!

On point /3/ you say you pay tax "at the end".  I am not sure what 
you mean by this.   If you mean at the time you sell all your FIF 
shares, then this is really only a particular case of step 2 where 
your end of year balance drops to zero.  If you sell shares during 
the year you still end up paying tax on the, in this case, realised 
capital gain -  if that is what you mean.

Hmmm after proofreading my post, I'm starting to wonder if maybe I 
should set up in business as a tax accountant after all!   I was 
tempted to just tell you to ring the IRD, but from my own experience 
they have not much of an idea on this stuff.  And if the people who 
administer the the FIF regieme don't really understand it themselves, 
what hope is there for you the hapless taxpayer!  SNOOPY








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e-mail  tennyson@caverock.net.nz
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"You can tell me I'm wrong twice, 
but that still only makes me wrong once."


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