Consolation for share losses?

Press, 23 November 1987, Page 13

Consolation for share losses?

We have not heard a great deal from the Inland Revenue Department concerning taxpayers who should have been returning as income profits

In this article Jillian Lawry, Tax Manager at Lawrence Anderson Buddle, Christchuch, attempts to give some consolation (by way of tax relief) to many distraught shareholders.

from share sales. Maybe it is because the department’s campaign commenced at the beginning of the year to make shareholders more aware of their position under current income tax law

has been successful. It has been so successful that everyone is owning up to the taxable profits they made on the sharemarket. Or It could be because some soothsayer at the Inland Revenue Department predicted the recent sharemarket dive and feared taxpayers would be returning the resultant losses?

As part of the campaign to convince people to make a "clean breast” of their sharemarket activities the department published an information leaflet in April, 1987, entitled "Taxation of Profits from Selling Shares.” The following are the

TAX TALK

relevant extracts from that leaflet: • "... losses made on selling or disposing of shares can be deducted for tax purposes where it is a normal part of your business to trade or deal in shares ...”

• "... if you have made a loss on a particular share sale and can show that had a profit been made it would have been taxable, you may claim the loss as a deduction from other income

• "... If you have entered into any undertaking or scheme for the purposes of making a profit from shares any

losses actually realised can be deducted for tax purposes ...”

The same criteria which apply to determine the tax liability of profits' on the sale of shares apply in the situation when realised losses have arisen.

The department leaflet also provides that if a taxpayer wishes to claim such losses the IRD would normally expect that the same taxpayer would have "returned profits from similar transactions in the current and/or earlier years.” But what happens, if as with many businesses in their first year of operation, start-up losses are incurred, perhaps while the operators are feeling their way? In the present case it just so happens that in the first year of the operation of buying and selling shares with all the intention in the world of making a healthy profit the market tumbles.

We may now have the ironical situation of taxpayers, in order to claim their losses, arguing that they come under one of the three limbs specified above. The department then disallows these losses on the basis that they do not come under any of the three limbs. Remember, however, that once losses have been claimed In one Income year these losses could taint the non-taxa-bility of future profits from the same source.

Again we enter a subjective realm of “intention.”

There may be genuine cases of taxpayers who have their fingers' badly burnt These taxpayers vow and declare that any future share acquisitions will be for long-term holding purposes or as a hedge against inflation. Has a claim for losses in a previous income year ruined their chances for any more straight capital gains?

Arguably, if the taxpayer is not a dealer and the transaction does not

come within one of the two other criteria above, then any profits are not taxable.

This is all very well in theory but could cause problems when the IRD

decides to take a close look at the particular transactions. After all, a leopard does not change its spots overnight unless of course the leopard has had its paws burned. The message for all suicidal shareholders should read:

In many abw yesterday's non-taxable flutter

on the share market can become a taxable activity for the purposes of claiming losses. But don't jump into the tax net prematurely. There is always tomorrow. CSR offer

CSR has Increased its stake in Softwood Holdings to 8.9 per cent under its current sAust3l7M (SNZ3SSM) joint take-over bid for associated timber companies Softwood and Timber Holdings. CSR executive director, Gene Herbert, said the resources, building and sugar conglomerate now held 9.18 M shares in Softwood