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.
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