Anything bought for resale can be taxed

RECENTLY the IRD released a statement considering whether the proceeds arising from the sale of gold bullion would generally be taxable.

While not many folk actively invest directly in gold bullion, the principles underpinning this statement are worthy of wider consideration.

We often talk about New Zealand not having a comprehensive capital gains tax but rather a piecemeal variety which taxes gains arising from the sale of certain assets under certain circumstances.

Land is the most commonly discussed version of this, such as property speculators, but there are also provisions which capture personal property sales. Personal property is pretty much every kind of property other than land, and includes cars, gold and other precious metals, shares, artwork, and anything else of a similar nature.

Similar to its cousin, taxing land sales where the land was acquired for the purpose of resale, section CB 4 of the Income Tax Act seeks to tax the proceeds upon sale or similar disposal of personal property where that property was acquired with the intent of resale. This is a subjective test. However, if the full sale proceeds are taxable, then there is an ability to claim a deduction for the original cost plus perhaps some holding/finance costs, depending on the circumstances.

For this taxing provision to apply, the IRD noted that ‘‘purpose’’ must be the ‘‘dominant purpose’’ at the date of acquisition, and that the onus is on the taxpayer to prove another dominant purpose should the taxpayer disagree. Both of these assertions are correct.

Specifically, its base assumption is that gold bullion would ordinarily be acquired for the dominant purpose of resale. Given that you cannot eat it, play with it or derive an income stream from it, it would seem logical you would be buying it to ultimately sell, hopefully for a gain, although a profit motive is not necessary for this provision to apply.

For example, gold bullion may simply be a hedge to reduce losses in fragile economic conditions, as opposed to acquired for a profit, but even in that circumstance, to be ultimately effective, it needs to be sold so there could be an argument that such is your dominant purpose.

This ‘‘purpose of resale’’ is a default view. Now it may be that your purpose was something else or even no purpose, but you have to prove this counterfactual as the onus is on the taxpayer.

It is fair to say that in probably more than 90% of cases where bullion is acquired, this assertion by IRD is likely correct. But there is wriggle room for peculiar circumstances — perhaps you physically acquire and use gold in art, and sell the excess once you move on to the next big thing?

The more interesting question is how far does this assertion go for other types of personal property such as bitcoins, artworks you immediately put into storage, or stamps you place in a collection, or a vintage car kept in the garage to keep the kilometres down, or even shares in a startup company where the most likely crystallisation of value would be ‘‘exit’’. The IRD is quite within its rights to look at your personal property holding/selling circumstances, and reach a view that, on balance, you acquired such with the dominant purpose of resale. All these assets are possibly on a continuum from gold bullion, where the likely intent is resale, to possibly stamps where the most common dominant purpose is the joy of collecting and showing your stamp collection.

However, the IRD has the benefit of looking at such matters in hindsight, and thus can draw inference, one way or the other, from actions and evidence. Perhaps the longer an asset is held, the more likely another purpose may exist such as simply building a diversified longterm portfolio. Once the IRD has determined that it believes it was acquired for resale, the onus is on the taxpayer to prove otherwise, if they can and want to. Thinking about this up front may mean you can build your documentary evidence of the other purpose at the time of acquisition of any largely passive and appreciating personal property, rather than scrambling in a IRD review/ audit situation.

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