YOU ARE AN INVESTOR- ARE YOU IN BUSINESS? 

 

   

Section OB 1  of the Income Tax Act 1994 defines business to include “any profession, trade, manufacture, or undertaking carried on for pecuniary profit”

Whether a taxpayer is in the business of investing is dependent on that taxpayer’s fact situation.    The leading “business” case in New Zealand is Grieve v CIR (1989).   In that case the judge set out the factors relevant to the inquiry as to whether a taxpayer is in business:

the nature of the taxpayer’s activities, and
the period over which the taxpayer engages in the activity, and
the scope of the taxpayer’s operations, and
the volume of transactions undertaken, and
the commitment of time, money and effort by the taxpayer, and
the pattern of activity, and
the financial results achieved by the activity.

In determining whether income earned from investing should be declared in tax return it will depend if the investor is:

a passive investor

a speculative investor

a person in the business of investing

A passive investor is a person whose primary aim is to derive dividend and interest income from a secure investment portfolio.   There may be a secondary hope or possibility that the investments will provide long-term capital appreciation.   A passive investor will make changes to the investment portfolio from time to time to achieve this aim.   Some investors may also be actively involved in monitoring their investment portfolios (or engage an investment advisor to do this for them) to ensure that the primary aim of maximising dividend and interest yield is maintained.   The passive investor will not buy or sell investments for short term gain.  The passive investor is not regarded to be in business as an investor.  

                A speculative investor is someone who either acquires an investment with the intention of selling it, or carries on or carries out an undertaking or scheme, involving the investment, entered into or devised for the purpose of making a profit.   Investors are not speculative investors simply because they would like to see their investment capital increase, or that they may sell their investment if the capital increases.   Most passive investors fall within that description.   It is the person’s dominant purpose that is important in this distinction.   An investor may be a speculative investor in relation to one investment, and not in relation to another.    Profits derived or losses incurred in speculative investment activity are regarded as assessable income.

                  An investor who is fully in the business of investing should declare profits derived or losses incurred in that activity as assessable under Section CD 4 and deductible under Section BD 2 of the Income Tax Act 1994.

      

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