Capital gains tax in murky water

Q. My understanding is that someone who buys shares (or any other asset) for long-term investment with the aim to collect dividends (or rent etc) is not subject to paying capital gains tax in New Zealand.

However, if someone is deemed to be a "trader", they could be liable to capital gains tax.

I have chosen exchange traded funds (share funds traded on the stock exchange) as a core component of my share portfolio.

If I participated in a regular payment option (as is available with FONZ), and I bought $100 worth of shares every month, would I be deemed to be a "trader" because I bought shares 12 times a year, even though I would not be buying and selling 12 times a year?

Also, if I rebalanced my portfolio every quarter (where I bought and sold small numbers of shares to rebalance back to my original weightings of the different shares), would I be deemed a "trader"?

A. Here we go again, wading into the murky pool of tax on capital gains.

Your second sentence is, broadly speaking, right. New Zealand's capital gains tax applies only if you hold shares in companies not based in New Zealand or the Grey List countries, which are Australia, Canada, Germany, Japan, Norway, Spain, Britain or the US, says Deloitte's managing tax partner, Thomas Pippos. Because of this many New Zealanders invest only locally or in Grey List countries.

"Watch this space, however," says Pippos. "Dr Cullen is expected to release a discussion document in a matter of weeks seeking to remove the Grey List and extend New Zealand's version of a capital gains tax to all foreign equities."

The "trader" bit is trickier. Certainly people or companies that trade shares as a business do have to pay tax on their gains - and can deduct their losses. But if you buy shares "with the dominant purpose of resale" your gains are also taxable, even if you don't trade frequently.

It's not always easy to say when you will be caught by this. Certainly, being in a position to tell Inland Revenue you bought shares for the dividends - or property for the rental income - works better than saying you bought them in the hope of selling at a profit.

And, while nobody will give you a cut-off point, it's better if you hold your investments for a longer period.

On to your questions. Continuous buying of shares won't subject you to tax on gains, says Pippos. But continuous buying and selling would.

What about rebalancing? That depends on the volume of trade, whether you are doing it as a business and so on. Generally, mum and dad investors who buy and sell relatively small numbers of shares to rebalance wouldn't be caught, he says.

I suggest you rebalance less frequently. Unless your weightings have got hugely out of whack, once a year or every two years is often enough. If you do it more often, you will find yourself selling a share and then buying it back a few months later, incurring trading costs and hassle along the way. Less frequent rebalancing would also help to keep the IRD at bay.

Q. I asked the IRD about buying shares and what expenses are deductible.

Their response was, "If you buy shares for the purpose of receiving dividend income, the cost of newspapers/investment reports to select which shares to buy is non-deductible. This is because there is insufficient nexus between the cost of the newspaper and the income-earning process to allow a deduction."

But authors of books about tax suggest any items that are sought for the sole purpose of obtaining share dividend income are chargeable against tax.

Who is correct?

A. Another curly one. I note that you are an accountant, albeit perhaps not a tax specialist. If you can't decipher what you read, what hope is there for most others? Still, we'll try to shed some light on this.

The difference in the info may lie in the fact that the IRD is writing about money you've spent "to select which shares to buy". But, says Thomas Pippos of Deloitte, "if the costs are to also monitor and manage dividends, then they are deductible to some extent".

For mum and dad shareholders who hold only New Zealand or Grey List shares, the following are generally not deductible, says Pippos: brokerage, the purchase price of the shares, and "costs incurred in establishing a portfolio", including getting initial advice. However, the costs of monitoring the portfolio are deductible.

The costs of investment reports may have to be apportioned between the establishment of your portfolio (non-deductible) and the monitoring of it (deductible).

What about the newspaper you are reading now? "Theoretically you may be able to assert that part of the cost is attributable to monitoring your investments," says Pippos. "But you also read the news."

You can come up with a reasonable apportionment, but if it went to court it would be up to you to convince the judge it was reasonable. The same would apply to your internet expenses, for example, if you use the net to monitor your investments.

Q. I have noticed the trend over the past year or so for shops to charge extra if you pay by credit card, particularly with small computer stores (almost invariably run on low margins). I challenged some and they backed down, but others did not.

I knew that Visa's merchants' agreements used to include a ban on the practice of charging more for credit card transactions, so I rang Visa and asked for an explanation. "Yes," they said, "that used to be the case, but the clause was quietly dropped a few years ago."

I'm rather put out at Visa for this - not for dropping the clause, but for failing to publicise the change of policy which, if I recall correctly, was widely publicised when credit cards were introduced.

A whole generation of us can remember such things and I hate finding out that I have been arguing from out-of-date facts. To be blunt, I was wrong.

For the record, my mother died a few years after we were married and left an estate of $25,000.

We were flatting in Mt Eden at the time and decided to buy there because of the proximity to transport and the ability to walk or cycle to work.

We paid $55,000 for a fairly standard villa (now in a heritage zone) in 1980. I wish I could say that we planned the house purchase as a retirement fund, but I guess I'll have to admit to being dead lucky, not once but several times.

For comparison, my sister-in-law bought a house in Island Bay, Wellington, for much the same reasons. She paid around $40,000.

Now our place is worth more than twice as much. Why? Mainly because changes in the Grammar School zone boosted us into the stratosphere 10 years ago. Also, the extra capital at the vital time enabled us to buy a bit higher up the ladder.

Lastly, I admire your patience with those who tout their good luck as the result of forward thinking.

I'm a risk analyst. I have been doing computer security for more than 10 years now. I know all about luck.

A. Let's not be so hasty in calling you wrong. I don't know which Visa person you talked with. But the word from Iain Jamieson, Visa's country manager for New Zealand, is: "Visa does not allow surcharging in New Zealand, and have a firm position that cardholders should not be penalised for using their cards."

He adds that "banks are responsible for the relationship with merchants. Part of this relationship is making sure that they do not add a surcharge for credit card transactions." So keep up the good work of challenging retailers.

On house prices, it is indeed refreshing to come across someone who doesn't attribute their growing house wealth to cleverness, but rather to luck. There are scores of unforeseeable factors - such as changes in heritage zones or school zones - that can affect property values.

I've owned eight properties, in Wellington, Auckland, the US and Australia. In each case I thought it was a good buy at the time.

I've lost money on two - in one case after taking alterations into account. Both the losers were in "nice" Auckland suburbs, in the late 1980s and early 1990s. On the other hand, four other properties grew well, and two have been spectacularly successful.

I'm sceptical of anyone who says - after their house value has boomed - that they knew it would happen.

One last thing: I don't think buying a house "a bit higher up the ladder" necessarily brings a bigger percentage gain.

More expensive houses seem to zoom up faster in booms but are also more likely to be hit by busts.