Taxing the entrepreneurial spirit – the accidental trader
One of the first tax cases I studied was around an individual who bought one million toilet rolls to sell on to a single individual for a profit. The taxpayer tried to argue (unsuccessfully) that the profits on sale couldn’t be taxable because a single transaction is not in the “adventure of a trade”.
A good try; the Courts found in favour of the Revenue Authority and agreed that it was a little far-fetched to take the view that they were originally acquired for personal use and neither was it something that would lend itself to a long-term investment proposition.
Intent to sell key
This is an old UK case, but our tax system acknowledges this type of situation. While our rules will tax profits from business activities (being activities that have volume, frequency of transactions and a profit motive) it will also tax profits arising from isolated transactions and business dealings.
Specifically, profits from the sale of property are taxable if:
The property was bought for resale; and/or
You have carried out an undertaking or scheme to make a profit;
You are in the business of dealing in personal property.
These tests tend to focus on the reason for acquiring the property in the first place. If not, all property would be caught if ever sold, which would clearly be wrong (that’s a comprehensive capital gains tax, which we don’t have).
For example, a distinction is to be made between the person who sells their old TV on Trademe, in contrast to the person who bought a TV with the dominant purpose of putting it on Trademe to sell at a profit. The former is not subject to tax, the latter would be.
A recent discussion over a beer with Sam (not their real name) made it really clear to me that these rules are not necessarily readily understood. I can assure you that I don’t normally hold counsel with people in the pub over witty tax anecdotes, the conversation just evolved…
Sam has a day job, but also has a keen interest in cars, knows a bargain when (s)he sees one and is mechanically minded. Sam was pleased to tell me that (s)he buys, fixes up and sells two or three cars per year and makes really good tax-free money from it.
There’s some sympathy for Sam’s tax-free position as (s)he has taken comfort from Trading Standards and the Motor Vehicle Traders Register position.
As I understand, a person must register and are considered to be in the business of motor vehicle trading if:
They sell six or more motor vehicles within 12 consecutive months; and/or
Import more than three motor vehicles within 12 consecutive months.
While Sam isn’t necessarily a trader per Trading Standards or the Motor Vehicle Traders Register, the tax legislation simply doesn’t care. As the cars are bought for sale (and with a profit motive in mind) the profits are taxable.
So, what does this mean?
It’s not just about cars, it’s about everything you own and can include New Zealand domestic shares you personally hold. Cryptocurrency is also a good example of where these rules can apply.
Share trading platforms
The tax legislation hasn’t changed, but accessibility to market has. For example, there are many share trading platforms available to use with ease, “Sharesies” immediately springs to mind. The ease of trading via these platforms can accidentally bring the profits into the tax net.
It’s wise to document your intentions at the time of acquisition and perhaps also the reasons for sale (for example, you may have fallen on hard times forcing a sale), but this is not fool proof. Actions and circumstantial evidence can speak louder than words.
And lastly, Sam and I don’t catch up anymore.
Contact your local BDO adviser today to learn more about tax rules in relation to intent to sell.