The taxation of share investments in New Zealand can be complicated, particularly for those dealing with offshore shares. Many investors coming from jurisdictions with capital gains tax regimes assume that the same rules apply here, leading to misunderstandings. Recently, Inland Revenue released draft guidance on the taxation of share investments, which helps clarify these rules, especially in relation to the Foreign Investment Fund (FIF) regime.
Key Takeaways from the New Guidance
The Foreign Investment Fund (FIF) Regime
The FIF regime, in place for nearly 17 years, remains a critical aspect of New Zealand’s tax framework for offshore shares. However, its application is not always well understood. The new guidance provides clarity on when the FIF rules apply, particularly for shares outside Australasia. A key point for investors to note is that some listed stocks in Australia may also fall under the FIF regime, even though they are on the ASX.
Ordinary Rules for New Zealand and Australian Shares
Shares listed on the New Zealand Stock Exchange (NZX) or certain Australian shares that do not fall under the FIF regime are subject to the ordinary tax rules. Inland Revenue’s guidance explains when these rules apply, which is crucial for determining how realized gains from share sales are taxed.
Taxation of Share Sales: The Dominant Purpose Test
One of the most important aspects covered in the guidance is how to determine whether gains from selling shares are taxable. Under section CB4 of the Income Tax Act 2007, if shares are acquired with the “dominant purpose” of disposal, any gains from selling them are taxable.Deciding the dominant purpose at the time of acquisition is crucial, and it can be influenced by several objective factors. Investors often have multiple reasons for buying shares, but to avoid tax on gains, they must demonstrate that disposal was not their dominant purpose. Interestingly, they do not need to prove an alternative dominant purpose; they simply need to show that disposal was not the primary goal.If an investor can prove that the shares were acquired primarily for dividend income, long-term asset growth, portfolio diversification, or voting rights, the gains from sales are generally not taxable. However, if these outcomes are intended to be achieved through an eventual sale, the sale could be taxable.
Case Law: The National Distributors Example
The guidance draws on key case law, notably the Court of Appeal’s decision in CIR v National Distributors. This case highlights how the courts assess dominant purpose based on the facts. In this instance, the taxpayer made several share purchases and sales over a two-year period. Despite holding some shares for family reasons, the court found that others were acquired with the dominant purpose of sale, making the gains taxable.The case serves as a reminder that even if shares are held for a significant period, the purpose at the time of purchase remains critical in determining tax liability.
Inland Revenue’s Compliance Efforts
The guidance also discusses recent developments in data collection and compliance. Inland Revenue has been using the Common Reporting Standards (CRS) on the Automatic Exchange of Information to gather information on offshore investments. Since 2018-2019, they’ve been cross-referencing this data with tax returns, identifying discrepancies where offshore investments have not been declared. This latest guidance is likely part of a broader strategy to enhance compliance and ensure investors correctly report and pay tax on their share investments.
New Areas Covered: Share Lending and Online Investment Platforms
The guidance also touches on share lending arrangements and investments made via online platforms, which are becoming increasingly common. Although the focus is on these newer forms of investment, the principles apply broadly to traditional share investments made through brokers.
