No Tax on Capital Gains in NZ – Is That Right?

Capital gains are theoretically tax free in NZ.

They are tax free to the extent that they arise on a sale of a capital asset used in the production of taxable income.

For example if buying shares at $1.00 each then your purpose in buying the shares has to be looked at. You can say that your purpose was to live on the dividend income and therefore you are selling the shares to buy other shares to provide you with income. You have sold a capital asset and the resulting gain is tax free.

You have to convince IRD that your purpose in this exercise was to provide an investment which would be stable and provide you a cash flow, independent of the gains that you would make from buying and reselling.

Conversely if the market went down and your shares dropped to 80c there would be a capital loss which could not be deducted from the income earned because it was a capital loss and not a revenue loss.

However, if you were in the business of buying and selling shares then it would be a revenue loss and therefore deductible.

Another important factor to consider in taxation, aside from the principles discussed, is timing. You are only taxed on income earn during a particular tax year. If you don’t earn income in that year you can‘t be taxed on it until the next year.

Earning income has little to do with wishing to receive it. You can be (and most people are) taxed on income that is earned but not yet received. If you can understand these basic principles then you are ready to understand how tax is affected by such things as inflation and law.

© 2005 StartRunGrow

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