Profits on Vector shares taxable

Inexperienced investors looking to make a quick buck from the listing of power lines company Vector need to keep their eyes open for the tax man when buying shares, a tax expert warns.

Greg Haddon, senior tax partner at financial services consultant Deloitte's Auckland office, said many investors buy shares under a misconception that gains made after selling them are capital gains and therefore not subject to tax.

Haddon said that although New Zealand does not have a general purpose capital gains tax regime, the Income Tax Act "deems a gain to be taxable where the person acquired the share for the purpose of resale, is a dealer in shares or carried out an undertaking or scheme entered into or devised for the purpose of making a profit".

Haddon said many households may apply for an allocation of shares, intending to sell immediately for a quick gain, unaware the money they make is liable for tax.

He added that the scale of the $593 million Vector listing will attract particular attention from the Inland Revenue Department.

"The Inland Revenue have found the identification of individuals who acquire shares for resale difficult.

"As a result they have not been active in investigating individual share investors," he said.

"However, in a high-profile listing such as this I would not expect the IRD to be complacent."

The IRD confirmed an investor who sold shares one month after purchase could be liable for tax if they bought the shares "with the clear intention of reselling them".

The spokesperson said a long-term investor acquires shares to earn an income from dividends and would be liable for tax on those dividends but usually would not be liable on any profit made from selling the shares.

"It is Inland Revenue's position that any profit derived from the sale of shares by a long-term investor is usually capital in nature and not liable to income tax."

However, it is not the length of time an investor owns a share but rather their intention at the time of purchase that determines their tax liability.

"Inland Revenue would look at a person's trading activities to determine their intention at the point of purchase," the spokesperson said.