Which Avenger pays the least taxes? Spider-Man, because his income is all net.
Worrying about tax on share trading doesn’t need to be a barrier to investing. In fact, knowing your way around your taxes can make you feel like a superhero. We will explain how tax on shares in NZ works so that you can be confident when tax time comes around.
Tax on shares for NZ investors
If you are an NZ resident and investing in the New Zealand share markets, there is no tax on the profit you make from investing unless you are in the business of trading shares.
Note: If your investment has gone up in value and you haven’t sold, this is called unrealised gains - it is not considered a profit until you sell.
If you have investments outside of New Zealand, such as in the US markets, something you’ll need to consider is the foreign investment fund (FIF) tax. This only becomes relevant once your initial investment cost (for FIFs held on a particular day) reaches $50,000 NZD, if that doesn’t apply to you then tax time can be very straightforward.
Tax on the sale of shares
Unless you are considered a trader rather than an investor, you won’t pay any tax if you sell your New Zealand shares. However, if you have earned dividend income from your shares, you will pay a tax.
Generally speaking, unless you’re a US tax resident there is no tax on the sale of shares purchased on the US markets. New Zealand has a tax treaty with the USA, so if you need to pay tax in NZ, you should be able to claim a credit for some or all of the tax that you’ve already paid in the US.
Certain US shares attract a 10% withholding tax on being sold: If you have sold any Publicly Traded Partnership (PTP) shares such as Hashdex Bitcoin Futures ETF (DEFI) or Cedar Fair LP (FUN) for example, then this tax may apply. The tax will be paid on your behalf by your broker when you sell unless the PTP has an exemption.
Tax on share trading
If you are considered a trader by Inland Revenue (IRD), you may have to pay tax on any profits when you sell your shares. What constitutes a ‘trader’ under IRD’s definition in NZ:
- You are in the business of trading shares
If you regularly buy and sell shares with a level of professionalism, especially when a portion of the money you use to invest is borrowed
- You buy shares intending to make a profit
If you buy shares with the intention of selling them for a profit in the short-term, or buy highly volatile shares to ‘flip’
New Zealand operates a ‘self-assessment tax regime’ where it is up to the investor to disclose any income received, and the nature of that income, to the IRD. The IRD may follow up with investors to check the accuracy of records, so it's good practice to keep records of your trades and the intent behind them. Frequent trading and short-term buying then selling - intra-day or day trading - are more likely to be taxed. If you’re unsure whether you’re a trader, seek advice from a tax professional.
Read more: Day trading, is it hazardous to your wealth?
How does capital gains tax work on shares?
When you buy an asset and it increases in value, that increase is called a capital gain. New Zealand doesn’t have a capital gains tax. This means that in many cases you can buy assets, sell them at a higher price, and keep all profits tax-free. Do you pay capital gains tax on shares? The answer is no.
New Zealand has a ‘Bright-Line test’ for property investment, which could be compared to capital gains, but by definition is not the same thing. This tax applies only to residential property bought and sold within a specific time frame. The IRD has a helpful Property Tax decision tool you can use if you think this tax may apply to you.
Read more: Property vs Shares: A battle of the heavyweights
Tax on share dividends
Generally speaking, dividends from shares are counted as income and are subject to tax. The source withholding tax rate will depend on the jurisdiction of your shares (the country or location of the company you hold shares in). Tax on dividends is generally paid at your marginal tax rate, calculated when you file your end of year NZ tax return. In some cases, it is already deducted from the amount of dividends you receive, but you need to check this with your broker before you’ll know if it’s all sorted come tax time.
Read more: What are dividends?
New Zealand dividend tax
The NZ tax rules that determine who needs to file a tax return depend on how much you've invested, the dividends you receive during the tax year (1 April – 31 March), and whether you've received any other untaxed income. In many cases, the tax on dividends is paid on your behalf by your broker before the dividends reach your account. Check with your broker to see if they pay tax on your behalf, or if you need to make the payment yourself.
Do you have to pay US tax on dividends from US shares?
Yes, if you invest through Hatch the US withholding tax is deducted before the dividends reach your account. The US withholding tax rate on dividends for non-US tax residents is usually 15%, given you’ve completed a W-8BEN form.
As long as you’re not a US tax resident, Hatch will automatically submit all your required annual US tax reports on your behalf. Hatch charges a $0.50 US fee for tax reporting (excluding FIF reporting), which is deducted from investors' accounts at US tax time.
If you invest through Hatch, you can see what your situation is in your Hatch tax reports and learn what you might need to do at tax time.
Foreign Investment Funds
Also known as FIF, this describes certain types of overseas investments including;
- Shares in overseas companies.
- A foreign unit trust (despite its name, under NZ tax law these are treated as foreign companies, these could be things like foreign mutual funds).
- Any overseas superannuation schemes.
- Life insurance policies taken out through an overseas provider.
These investments are classified as FIFs and require a specific tax calculation to determine the taxable income associated with them. You only need to look at FIF tax rules if your initial investment cost surpasses $50,000 NZD at any point in the tax year. Spouses with joint holdings have a $100,000 NZD threshold (i.e. $50,000 NZD each).
Read more: FIF tax rules for individuals and trusts
CFC FIF disclosure
You might have read about CFC and/or FIF disclosures when filling out your IR3 form online. A Controlled Foreign Company (CFC) is a company based overseas, in which a resident(s) of New Zealand owns a controlling portion.
CFC FIF disclosure involves letting the IRD know if you hold a controlling interest in a foreign company so that you can be taxed appropriately. This could be relevant to you if you are a New Zealand resident and:
- You have total ownership of a foreign company.
- Five or fewer New Zealand residents have a controlling interest of more than 50% or control shareholder decision rights.
- You have a controlling interest of 40% or more.
If you invest in foreign companies through Hatch, unless you own 50% of total Amazon shares, for example (congratulations if you do), you likely won’t have to worry about having to complete a FIF disclosure. If you hold an income interest of less than 10% in a foreign company then you are usually exempt from this requirement. Check the list of exemptions on page 20 of the IR461 Guide to FIF PDF.
For more information on CFC FIF disclosure, or to file a CFC disclosure, head to the Inland Revenue website’s section on controlled foreign companies.
Foreign Shares and Double Tax Agreements (DTAs)
A double tax agreement (DTA), also known as a tax treaty, is an agreement between two countries to solve problems with double taxation, and help with information sharing for tax administration among other things.
New Zealand currently has 40 DTAs in place with countries considered to be our main investment and trading partners. If you invest in a foreign country, such as buying shares on the US share markets, a double tax agreement will ensure that your earnings aren’t taxed twice.
Tax credits on foreign shares
If you’ve received dividends from foreign shares, you may be eligible for a tax credit. To calculate this you’ll need to know;
- The rate your dividends were taxed at - this differs depending on where the company is based. You’ll be able to see the rate, and how much tax was paid in your end-of-year tax reports from Hatch.
- Whether New Zealand has a tax treaty with the country where the company is based. If there is a treaty, then the maximum tax claimable is the amount specified in the treaty.
On Hatch, almost all investments will be US-based and therefore have a WHT rate of 15% (assuming you have filed a W8-BEN). If you have invested in American Depositary Receipt (ADRs), the tax rate applied will be that of the country the company resides in.
To find the withholding tax rate for the country that the company is based in, you can search online for “Country + withholding tax” and find useful tax information from sources like PWC and KPMG.
Examples of international withholding tax rates
Taiwan - Dividends paid to non-residents are subject to a withholding tax (WHT) of 21%
China - Non-tax resident Enterprises (TREs) without establishments or places of business in China are subject to a withholding tax of 10% on gross income from dividends.
France - Withholding tax is automatically imposed on after-tax profits of a private equity (PE) unless certain conditions are met. New Zealand has a reduced tax treaty rate of 15%
Netherlands - Dividends from Dutch resident corporations are generally subject to a 15% Dutch dividend WHT. New Zealand has a reduced tax treaty rate of 10%
Read more: What is an American Depositary Receipt?
Tax Glossary
Still struggling to wrap your head around tax terminology? Learning a few basic terms could better help you to understand your obligations come tax time.
Gross - the total amount. For example, your gross earnings are the amount you earn before tax.
Net - The amount that is left over after you take away expenses and taxes. For example, the amount of money that is paid into your bank account after tax has been paid.
Gain - An increase in the value of an asset, where the current price is higher than the price originally paid.
Loss - A decrease in the value of an asset, where the current price is less than the initial investment cost.
Dividend - A share of a company's profits, typically paid in cash, to people who hold shares in the company.
I need more help!
Hatch does not offer tax advice. This article is intended for general information purposes only. We don’t know your individual tax situation but we are happy to point you in the right direction. If you have any questions:
- check out our Help Centre
- contact our friendly support team or
- talk to a tax professional
We’re not financial advisors and Hatch news is for your information only. However dazzling our writing, none of it is a recommendation to invest in any of the companies or funds mentioned. If you want support before making any investment decisions, consider seeking financial advice from a licensed provider. We’ve done our best to ensure all information is current when we pushed ‘publish’ on this article. And of course, with investing, your money isn’t guaranteed to grow and there’s always a risk you might lose money.
