Are you a New Zealand tax resident investing in shares? Whether you use an online platform or a broker, it’s essential to consider the potential tax implications. Inland Revenue’s (IR) draft guidance could offer clarity—though it doesn’t apply to those investing through managed funds or KiwiSaver. Some key issues are highlighted below.

Where to start

Broadly, there are two different sets of tax rules that could apply to an individual New Zealand tax resident (not a transitional resident) share investor: the ‘ordinary tax rules’, or the foreign investment fund (FIF) rules.  If you have investment in foreign companies, start with the FIF rules.

FIF rules

Foreign shares are one type of FIF interest. Other interests include an investment in a foreign superannuation scheme, and a right to benefit from a life insurance policy issued by a FIF.  Some interests like shares in certain Australian companies, may be exempt.

If the total costs of FIF interests held during the year is more than $50,000, the FIF rules will apply. For share investments in a foreign company, if the FIF rules apply, you must calculate FIF income and include it in an IR3 tax return, along with an overseas income form (IR1261).

There are five FIF income calculation methods available, each with specific eligibility criteria and nuances. For example, tax may be payable even if no returns or gains have been received. The correct tax treatment will depend on the facts and circumstances of the investment and the investor. IR’s draft guidance provides more details and references.

Ordinary tax rules

If the FIF rules do not apply, the ordinary tax rules will apply. Generally, this means dividends received from share investments in New Zealand and foreign companies will be taxable, and gains from share sales may also be taxable.

Dividends

New Zealand companies usually withhold tax on dividends paid via imputation credits and resident withholding tax. The treatment is generally similar if a foreign company pays a dividend to a New Zealand custodian who holds the shares on your behalf. Dividend details are recorded in your myIR account and are pre-populated in your automatic assessment or IR3 tax return. Amounts should be checked and corrected if needed.

If you receive a dividend from a foreign company and no New Zealand custodian is involved, it must be returned as income in New Zealand dollars, using the exchange rate on the payment date. An overseas income form will need to be completed and filed with the return.

You don’t need to return a foreign dividend if your non-reportable income for the year is under $200 (broadly, non-reportable income is income where tax is not withheld by the payer). If tax was withheld on the foreign dividend overseas, you might be able to claim a foreign tax credit (subject to limitations) when filing your tax return.

Gain on sale

In some cases, gains on share sales may be taxable. Briefly, taxable income may arise on sale of the shares if they were bought: 

• as part of carrying on a business of share dealing;
• with the dominant purpose of disposing of them;
• as a part of a profit-making undertaking or scheme.

Extensive case law defines the criteria required to be satisfied for taxing, such as the meaning of ‘carrying on a business’, determining whether a person has a ‘dominant purpose of disposal’ and when the test is applied; requirements for a ‘profit-making undertaking or scheme’. Satisfaction of the relevant test is assessed on a case-by-case basis.

Final thoughts

When the draft IR guidance is finalised and published it will be a helpful resource for individuals who invest in shares. Read CA ANZ’s submission on the draft guidance.