Penalties a taxing ordeal

After your recent article on the tax treatment of share trading, I would be grateful for your opinion on the following situation.

When a stock I own has a solid rise, say over two years (common in New Zealand now), my sharebroker suggests (demands) that I sell some to capitalise profits, reduce exposure, etc.

My accountant wants to declare this as trading profits for taxation, which I refuse to do. Do you believe I should?

Sorry to say it, but yes.

Whenever friends say they don't declare some income to Inland Revenue, or deduct an iffy expense, I ask, "Have you been audited?" The answer is always, "No."

You can get away with anything until you are audited. But you never know when you might get that tap on the shoulder.

If you are regularly selling shares you've owned for only a few years - and especially if you're selling to capitalise profits - you'd be hard pressed to convince the IRD that you didn't buy "with the dominant purpose of resale", which means your gains are taxable.

And unless you can convince them, you may have to pay not just the tax but also interest and penalties.

Brace yourself! First, there's a late-payment penalty of 5 per cent once your tax is seven days late, which then goes up by 1 per cent a month. That rate has applied since April 2002. For earlier periods, it's higher.

On top of that, you pay interest at the princely rate of 13.08 per cent.

You may also be charged shortfall penalties, says Inland Revenue. "These may range from 20 per cent of the deficient tax for not taking reasonable care in completing the return, to 150 per cent for evasion, depending on the circumstances."

You could wind up paying several times the tax owed.

You can always hope you'll never be audited. But it's a gamble with rather high stakes.

I suggest you talk with your accountant about coming clean. And if your sharebroker hasn't ever discussed the tax ramifications of frequent trading with you, and pushes you to trade more often than you want to, it might be time to switch brokers.

Like your correspondent a few weeks ago, I also have believed and continue to believe that retailers cannot add a surcharge for using a credit card.

However several companies - travel agencies in particular - offer a "discount" for non-card payment. That's effectively the same thing since you never see the detail of the package, but it is presented differently and cunningly gets around the "no surcharge" issue.

It does make things difficult when you want the complimentary travel insurance offered by gold card issuers though.

Good point. To you and me, there's no difference between a shop charging more if we use a credit card or charging less if we pay without a card. But technically, that's not so.

Visa's New Zealand manager, Iain Jamieson, is adamant that merchants shouldn't charge extra for card use.

But discounting is trickier. "If a holiday is advertised for $1000 but if you pay with Visa you pay $1100, we have an issue with that. But if it's $1000 for a holiday but you get a discount for cash, they're not breaking any rules. There's nothing Visa can do," says Jamieson.

There is, however, something you and I can do. "Use your feet and go next door," says Jamieson.

To which I would add, ask about the merchant's credit card policy when you first talk to them. By the time the holiday - or furniture or car or whatever - is all lined up, you won't want to go through all that detail again elsewhere.

Iain Jamieson failed to say in your recent column that while the charging of merchant fees on Visa card transactions was not "allowed" in New Zealand, it is now illegal in Australia for credit card companies/banks to demand that of its merchants, because of a change in federal law.

You're quite right. And if we buy goods from Australia or travel there, we may be hit by a credit card surcharge.

Still, says Jamieson, only 7 to 12 per cent of Australian merchants sometimes charge extra, and only 3 per cent always do. Unsurprisingly, they tend to be in industries where there are monopolies or few choices, such as airlines and telecommunications, he says.

"If other merchants surcharge, consumers say, 'I won't buy your goods,' and the merchants are unwilling to lose that sale."

In my chat with Jamieson I learned some interesting stuff about how Visa operates.

It is a not-for-profit association, so any profit is distributed to its members, which are banks.

Each bank offers its own deal on interest rates, fees and so on. And it is the bank, rather than Visa, that is liable to pay up if somebody fraudulently uses your card.

A questioner in your column a while back made the comment, "One of the criticisms I have of financial planners is that they automatically sell and buy to rebalance, and don't think of other methods - such as using new money ... "

How on earth does your correspondent know this? As an investment adviser, I do not know what more than a couple of other advisers do, let alone have enough information to make such a sweeping generalisation.

Of course he may be right about some planners, but I had always thought that using new money to rebalance was quite standard practice. Maybe I must bow to superior market intelligence on this topic.

But still, a pity there was no justification given for the remark, and a pity you didn't comment on that omission.

Fair enough.

To put other readers in the picture, rebalancing is when you move your mix of investments back to what you originally wanted, after differing growth rates have pushed them out of balance.

The man who wrote a few weeks ago said that if you were saving regularly, it was better to simply put the new savings into investments in which you now had too little, rather than paying the costs of selling some of the big-growth investments and buying more of the others.

I've sent him a copy of your letter, and he responded that perhaps he should have said "many" or "several" planners.

However, he says, "I have sat in on quite a few discussions of financial planners as a peer review process and had them explain to me how they operate: set strategies, determine risk profiles, invest initial capital, rebalance, etc.

"In most cases, particularly where there are unit trusts as the vehicle, the rebalancing process is to make a decision and implement it straight away.

"It surprises me that the thought is virtually never along the lines of, 'If I use cash flow, where will the strategy be in 6 months or 12 months, and is that better than incurring the transaction costs?"'

He goes on to say that, "to rebalance with cash flow requires human intervention in most cases. Many/some/more than a few (see - he's learning!) don't review a client's portfolio at the time of cash flows."

He adds, "Good on you for looking at all options," but then rounds off with rather a stinging line: "If this person only knows what a few others do, then you have to ask: what training does he do? What conferences does he go to and what does he talk about?"

Please don't write in and tell me. I don't want a long correspondence on who does what. But I've published your letter because he shouldn't have tarred everyone with the same brush.

* Mary Holm is a seminar presenter, author of Investing Made Simple, and publisher of Holm Truths, a quarterly newsletter for employees, clients and superannuation scheme members.

Send questions to maryh@pl.net or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.