Q&As
- Risky to buy shares while waiting to buy a house.
- Is the gain on excess shares in an IPO taxable?
- Rental property depepreciation and Inland Revenue.
QI have been saving hard for my first home since the boom, and at the moment the asking prices are quite ridiculous for all the places I have seen.
Would it be silly to buy $10,000 worth of Vector shares? I keep hearing about diversifying and not putting all your eggs in one basket.
What tax rate would I be taxed at? Would capital gains tax be applicable? Should I even be thinking about taxes?
AIt’s always good to understand your tax situation. But tax isn’t the main issue for you.
The first question is whether you should put off buying a home, and unfortunately there’s no easy answer.
While pretty much everyone expects the pace of house price rises to slow, prices may continue to rise gradually or plateau, rather than fall.
Maybe you should keep looking at houses and put in a low offer when you see something good. If the seller is keen, you might get as good a price now as you ever will. Then again, prices might plunge in a while. Nobody knows.
Regardless of your timing on house buying, I don’t like your Vector idea much.
That’s especially true if you are planning to sell the shares when you buy the house.
If you invest in shares for a short period, there’s a reasonable chance — about one in five over three years — that their value will fall. And there’s a fairly big chance that you will do worse than just leaving the money in bank term deposits.
It’s not so bad if you are planning to hold the shares for the long haul. Still, I’ve got two concerns:
- While spreading money over different types of assets is generally a good idea, I think you are better to put all your savings into your home. This will keep the mortgage lower.
Then, after the purchase, pay off the mortgage as quickly as possible.
Repaying a mortgage is the equivalent of earning the mortgage interest rate on another investment, risk-free, so it’s an excellent “investment”.
It’s not good diversification, but other advantages — such as giving you security — tend to overwhelm that.
When the mortgage is lower, you might consider broadening out into shares, although many experts recommend waiting until your mortgage is fully paid off.
- It’s not wise to put all your share money into a single company. It’s the same eggs in baskets argument that you mention.
No doubt you are tempted by expectations that Vector shares will perform well. And maybe they will. You might curse me for putting you off. But you also might thank me.
Share floats are often disappointing. As Brent Sheather said recently in this paper, “Of the 55 companies that floated between January 2000 and March 31 this year, 69 per cent have performed worse than the broader market since listing, with five going bust.”
By the way, unless you are a holder of NGC shares or Vector capital bonds or you are an AECT beneficiary, you probably won’t be able to buy Vector shares in the float anyway — although you could buy on market soon afterwards.
On to your questions about taxes:
Vector expects its dividends to be fully imputed. So, if you do buy the shares, you will pay further tax on dividends only if you are in the top tax bracket, with income above $60,000, and then it’s only a small tax. If you in the 21 per cent bracket, with income below $38,000, you will get a refund.
On capital gains tax, read on:
QI was interested to read your reference to Deloitte tax partner Greg Haddon in the column two weeks ago, and his warning to those who plan to profit from an early sale of Vector shares that they might have to pay tax on their gains.
AECT customers were asked to nominate a sum they might be willing to invest in Vector, without any clue as to how successful their applications might be.
I suspect many will have applied for more value than they expect to receive in the hope that they secure enough to be worthwhile.
If they get more than they expected, some may decide that they cannot afford to hold so many shares and choose to sell some.
I fail to see how such people could reasonably be accused of planning to sell for profit even if a profit is made. I would be grateful for your view on this.
AMy view won’t help you in an audit. But Inland Revenue’s might, so I asked them.
Predictably, “There is no absolute ‘yes (profit taxable)’ or ‘no (profit not taxable)’ answer to this question,” says a spokesman. “Every case would have to be judged on its individual circumstances.”
The issue is whether the dominant purpose in buying the shares was to resell them.
“For example, a person may have decided he would like 1000 shares as an investment. To ensure he gets this number he may subscribe for 1250 shares,” says the spokesman.
“If in fact he receives more than 1000 shares, his intention may be to sell any shares that are surplus to his requirement. Or, he may not have formed an intention regarding any surplus. Either way, his purpose when acquiring the shares will not necessarily be resale, where it is clearly a secondary factor to the principal purpose of buying shares to hold.”
“A person does not have a purpose of sale merely because they contemplate the possibility of sale at a later date. They would need to have a fixed plan in mind.”
So far so good.
However, the spokesman says, “Where resale is the taxpayer’s general practice or specific intention (as in the case of deliberate ‘stagging’ of new shares), the resale is taxable.”
In judging a situation, the IRD would look at:
- the person’s history of buying and selling shares;
- the number of shares bought and sold. If a taxpayer buys 10,000 and immediately sells 8500, “this might raise the assumption of a purpose of resale”;
- the length of time the shares were owned;
- the reasons given for the buying and selling; and
- the evidence supporting these reasons.
Note that the spokesman adds: “These tests apply equally to those who trade in shares for the first time, or as a one-off transaction.”
That should clarify the situation for most people.
QIn relation to the recent questions on chattels depreciation, how do we keep IRD to the “few months” they have indicated for direction from Adjudications and Rulings?
As investors and property advisors this is all we ask, for the IRD to give us clear direction.
As the “specialist” valuation company in this area we have been working very closely on this issue to get resolution.
The problem we have is that every person within IRD that we speak with gives a differing view of IRD’s position.
AAgain, I asked Inland Revenue.
The department works on lots of issues about technical interpretation, said a spokesperson. “These can often be complex, with many relevant decided cases and a variety of differing arguments and views to consider.” Working through them, “so that our analysis and conclusions are robust,” takes time.
Still, IRD is aware “that this issue is of interest and importance to many taxpayers, and the Department intends to clarify its position as soon as possible.”
Meantime, the current view is as outlined in this column on July 30, “with everything that is ‘permanently affixed to or wrought into’ a building able to be depreciated at the same value as the building itself.”
If you are audited, and the IRD finds you have claimed depreciation incorrectly, “we will correct the position — using the disputes procedure if necessary.”
Anyone worried about this can contact the department to discuss their situation.
But what if, as you say, different IRD people say different things?
IRD says it’s continually working “to ensure the information it gives to taxpayers is consistent and accurate.”
The people at its call centres “work from a single knowledge base that is regularly updated, and we have robust processes in place to test the accuracy of information we provide.”
When you ring you must, of course, provide all relevant information. “We suggest that taxpayers take careful notes of what they are told and would encourage them to call us back if they have any further questions.”
If in doubt, then, ring twice.
The department adds that under its charter, “taxpayers can question the information, advice and service we give them. We are happy to tell them about options available for resolving any disagreements.”
Not everyone is overly keen to rush into voluntary conversations with the IRD. But you can always ring anonymously.
You will be asked to key in your IRD number, but if you don’t you can still make a general inquiry about depreciation rules or anything else.
It’s only if you want to discuss your specific taxes that you must give your number.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.