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T A X A T I O N : T A X T I P S & T R A P S
- Use of a Company/Trust for holding investments can limit the maximum tax rate to 30% (Company) 33% (Trusts).
- Company/Trust has to return income from investments (other than shares) on an accruals basis, rather than when received.
A natural person can have up to $1m in investments and $100,000 of investment income before they have to use the accruals basis (with restrictions).
From 1 April 2009 the Government have announced that companies and trusts will get the same exemption as individual.
- Taxpayers on a tax rate of greater than 30% may be able to reduce tax on investment income by investing in a PIE.
- Where possible put income earning investments in the name of the taxpayer on the lowest marginal tax rate.
- Other than avoiding 38% tax rate no benefit in owning shares in the name of a person who has no taxable income other than dividends.
- The transfer of funds between family members for investment needs to be recorded by an Acknowledgment of Debt - otherwise may be liable for gift duty.
- Remember that the "capital gain" on the sale of Government stock, Capital Notes etc is taxable.
- As from 2008 tax year investments in shares not listed on New Zealand or Australian stock exchanges are subject to tax on 5% of the opening market value each year, irrespective of dividends
actually received or changes in value of the shares. Individual and family trusts can reduce the 5% if the shares have decreased in value.
As a general rule non New Zealand/Australian shares should not be owned by a company.
Individuals are exempt from the above if total "foreign" investments cost less than $50,000.
If however, you are a share trader 5% is the total income on the shares (each year). Actual gains/losses are ignored.
For successful share traders a company may be an advantage.
- The question of who is a trader depends on the facts of each case; the number of times you buy and sell shares and the amount of time involvement are critical factors.
If you are in the unfortunate position of showing a loss on shares you should consider trying to make yourself a trader so that losses can be claimed.
- If you have foreign investments (not shares) you may be required to account for unrealised foreign exchange gains/losses - once again natural persons with less than $1m of investments do not
have to account for exchange gains/losses until the investment matures.
- Remember that income derived by a child (under 16) from a Trust is subject to a minimum tax rate of 33%.
This is not so if Trust created by Will (and Trust has not received any other assets by way of interest free loan or gift).
- Property Investment (see our article "Tax on Rental Properties")
Common mistakes include:
| a) |
not identifying chattels separately and thereby missing out on an enhanced depreciation benefit.
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| b) |
not using a Loss Attributing Qualifying Company (LAQC) to own rental property. LAQC's offer the best of both worlds, the ability to stream losses to the person on the highest marginal tax
rate and income to the person on the lowest rate.
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| c) |
paying tax on depreciation recovered when a building is sold without identifying whether it is the land or buildings which have increased in value.
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| d) |
Forgetting that interest is only deductible on funds borrowed to directly buy the investment property.
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| e) |
Allocating all the loss to the partner on the highest tax rate even though the property is jointly owned.
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- Persons shifting to New Zealand after 1 April 2006
Persons who move to NZ after 1 April 2006 and have not been a tax resident in the previous 10 years are entitled to a 4 year tax exemption on most income derived form overseas. See separate article.
Disclaimer
The above notes are of a general nature only and each person must seek specialist advice.
This checklist is the property of Winstanley Kerridge Ltd and is not to be copied without express permission.
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