Share Investments and Tax: A Complete Guide for New Zealand Investors

The landscape of share investing in New Zealand has transformed dramatically with the rise of accessible platforms like Sharesies, making direct investment more affordable and appealing to everyday Kiwis. However, with increased participation comes the crucial need to understand the tax implications of your investment activities. Many investors have been caught off-guard by unexpected tax obligations, particularly around foreign investment fund (FIF) rules and taxable share trading activities.

The Inland Revenue Department has recently released draft guidance on share investments, recognizing that many average investors may be unaware of these complex tax rules. This educational approach aims to help investors understand their obligations before they find themselves facing unexpected tax bills.

Understanding the Ordinary Tax Rules

The foundation of share investment taxation in New Zealand starts with ordinary tax rules, which apply to specific categories of investments:

New Zealand Company Shares: All shares in New Zealand companies fall under ordinary tax rules, making dividend reporting and tax withholding relatively straightforward for investors.

Australian Company Shares: Shares in larger ASX-listed Australian companies that are exempt from foreign investment fund rules are treated similarly to New Zealand shares.

Foreign Shares Under $50,000: If your foreign shares and other attributing interests cost NZ$50,000 or less, and you haven’t opted into the Foreign Investment Fund (FIF) rules, ordinary tax rules apply.

For investments exceeding these thresholds or falling outside these categories, more complex FIF rules may apply, which can significantly impact your tax obligations.

Find out more about Foreign Investment Fund rules in our article: Overseas Share Investments Tax Implications

Dividends and Taxable Income: What You Need to Know

New Zealand Dividends

Dividends from New Zealand companies are taxable income, whether received as cash payments or other transfers of value (deemed dividends). The good news is that New Zealand companies report dividends directly to Inland Revenue and withhold tax on behalf of investors.

For most investors, this means simply confirming that Inland Revenue’s information is correct. However, those in the 39% tax bracket may need to pay additional top-up tax. If Inland Revenue’s records are incomplete, you must self-report any omitted dividends. A common example is distributions from energy consumer trusts, such as Entrust distributions received by many Auckland residents.

Overseas Dividends

Overseas dividends require more active management from investors. You must self-report these dividends in your income tax return. While overseas jurisdictions typically deduct withholding tax (which you can claim as a tax credit), this is usually less than the New Zealand tax payable, requiring additional payments.

Some New Zealand investment platforms simplify this process by handling top-up payments automatically, but it’s essential to verify this with your chosen platform.

When Are Share Sales Taxable?

One of the most significant misconceptions among New Zealand investors is that capital gains on shares are never taxable. This is far from accurate. Share sales become taxable when shares were acquired:

For the dominant purpose of disposing of them
As part of a business of share dealing
As part of a profit-making scheme

The Dominant Purpose Test

The dominant purpose is assessed at the time of purchase, not when you sell. Even if you later decide to hold shares long-term, any gains on sale will be taxable if your original dominant purpose was disposal. However, purchasing shares for long-term investment with only a vague hope they might increase in value wouldn’t typically create a dominant purpose of disposal.

Inland Revenue considers several factors when determining dominant purpose:

Nature of the asset: Some assets are more commonly held for trading
Length of ownership: Shorter holding periods may suggest trading intent
Purchase and disposal circumstances: The context around your buying and selling decisions
Transaction frequency: Multiple similar transactions may indicate a pattern

Supporting Your Investment Intent

Investors must be able to demonstrate they didn’t have a dominant purpose of disposal. Valuable documentary evidence includes:

Research materials from companies, platforms, or brokers used in decision-making
Information on expected dividend yields
Lending records if funds were borrowed for investment
Long-term investment plans or strategies

Are You Dealing in Shares?

Share dealing represents a higher level of trading activity that creates a business-like operation. Multiple factors typically combine to indicate share dealing:

High volume of regular buying and selling activity
Clear intention to profit from share sales
Regular, continuous portfolio monitoring
Systematic approach to buying and selling decisions
Frequent sales as part of normal profit-making operations
Significant amounts invested
Substantial time devoted to trading activities

Importantly, Inland Revenue sets a high bar for determining share dealing status. Casual investors using platforms like Sharesies as a hobby are unlikely to meet this threshold. However, if you’re spending significant time researching, buying, and selling shares with considerable frequency and investment amounts, you may need professional advice.

Interestingly, a profit motive isn’t necessarily required for share dealing to arise – the level and nature of activity are more important indicators.

Claiming Expenses on Share Investments

The ability to claim expenses directly relates to whether your share activities are taxable:

Non-taxable share sales: Generally, no costs or expenses can be claimed.

Taxable share sales: Legitimate expenses related to your trading activities can be claimed.

Be aware that claiming losses may trigger Inland Revenue scrutiny. They may request information to confirm shares were held on revenue account and expect consistent treatment – meaning if you claim losses as deductible, any profits from similar activities should be declared as taxable income.

The Complexity Challenge

Tax rules around share investments involve many vague terms like “frequent,” “significant,” and “dominant purpose.” This ambiguity means every situation requires individual assessment based on specific activities and circumstances. What might be considered trading for one investor could be seen as casual investing for another.

This complexity underscores the importance of professional advice, particularly as your investment activities grow in scope or value. Early consultation can prevent costly mistakes and ensure you’re structuring your investments tax-effectively from the start.

FAQ Section

Q: Do I need to pay tax on shares I buy through Sharesies? A: It depends on several factors including the type of shares, your investment amount, and your purpose for buying them. Dividends are generally taxable, while capital gains may be taxable depending on your dominant purpose for purchasing.

Q: What happens if my foreign shares are worth more than $50,000? A: Foreign shares exceeding NZ$50,000 may be subject to Foreign Investment Fund (FIF) rules, which have different tax implications than ordinary tax rules. There is no $50,000 exemption for Trusts. Professional advice is recommended.

Q: How do I know if I’m considered a share dealer? A: Share dealing involves high-volume, regular trading activity with significant time and money invested. Casual investing through platforms like Sharesies typically doesn’t constitute share dealing.

Q: Can I claim losses on my share investments? A: You can only claim losses if your share activities are considered taxable. Claiming losses may require you to treat any future gains as taxable income.

Q: Do I need to file a tax return for my share investments? A: You must file a return if you have overseas dividends to report, taxable share sales, or if your total income exceeds certain thresholds.

Q: What records should I keep for my share investments? A: Keep all purchase and sale records, dividend statements, research materials used in decision-making, and any documentation supporting your investment purpose and strategy.

Take Action: Get Professional Guidance

Share investment taxation in New Zealand is complex and evolving. With Inland Revenue’s increased focus on investment activities and the growing accessibility of share trading platforms, ensuring compliance has never been more important.

Don’t let tax complications undermine your investment success or result in unexpected obligations. Our experienced team at Business Like NZ specializes in investment taxation and can help you:

Understand your current tax obligations
Structure future investments tax-effectively
Maintain proper records and documentation
Navigate FIF rules for foreign investments
Develop compliant investment strategies

Ready to take control of your investment tax obligations?

Contact Business Like NZ today for expert guidance tailored to your specific situation. Book a free, no-obligation consultation to discover how we can help optimize your investment strategy while ensuring full tax compliance.

Call us now on 09 262 0726 or visit our office at 116e Cavendish Drive, Manukau City Centre, Auckland 2104.

Your investments deserve professional tax advice – don’t leave your financial future to chance. Let our expertise work for your success.

Have crypto currency and not sure of your tax obligations? See our article: Crypto Tax Obligations: What New Zealand Investors Need to Know