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Tax hit for gold bugs

An indication that Inland Revenue wants investors to pay tax on gold profits has been criticised as inconsistent.

Tuesday, March 1st 2016, 5:59AM 1 Comment

The IRD has put out an exposure draft for comment.

It said it was asked from time to time whether there would be tax consequences from the sale of gold bullion.

“It is sometimes suggested that because gold is often held as a long-term investment or hedge against inflation, there are no tax implications.  However, others have taken the view that investments in gold will give rise to tax implications,” the IRD’s paper said.
It said when gold was bought as an investment the proceeds from the sale needed to be included as income for tax purposes.

“In the Commissioner’s view, gold bullion bought as an investment will necessarily be acquired for the purpose of disposal and consequently any amounts derived on its disposal will be income. 

“The Commissioner considers that the very nature of the asset leads to the conclusion that it was acquired for the purpose of ultimately disposing of it.  Such a commodity does not provide annual returns or income while being held and has use or value only in its ability to be realised.

“The reason why a taxpayer decides to acquire property for disposal in due course is not relevant.  That gold bullion may be described as an investment, or acquired to provide a hedge, does not suggest that it was not acquired for the purpose of disposal,” the IRD said.

“Indeed, gold only has value as an investment or hedge because it will ultimately be disposed of.  This can be contrasted with other investments, such as shares, that may be acquired for purposes other than their ultimate disposal.  For example, shares may be acquired for a dividend stream or, even if the shares provide no yield, for any voting rights they confer.”

Only investors who could prove they purchased gold with no clear purpose could avoid the obligation to pay tax, it said. Those who were investing in jewellery could argue that they were not buying it for the prime purpose of disposal.

But Norman Stacey, of Diversified Investments, said the IRD’s position did not make sense. 

“It does not seem particularly consistent. They are mistaken that gold is always bought with the idea of resale. Gold can also be insurance. In a diversified portfolio it is not bought with the intention of resale.”

Gold prices have been rising quickly over recent months.

It is still trading below its 2011 high but has risen at its fastest level since the financial crisis this month on the back of international uncertainty.

Stacey said such a stance from the IRD could encourage people to hold gold outside their portfolio. “It’s unenforceable if they buy a bar and keep it in the kitchen drawer.”

But John Berry, of Pathfinder, said it made sense: "The only reason you buy gold as an investment is because you're expecting to be able to sell it for a higher price in the future.  Whether you describe it as hedging financial risk or diversifying your portfolio, it is hard to argue it wasn't bought with an expectation that the value would go up over time."

The deadline or comment is April 7.

Tags: gold Norman Stacy Pathfinder Asset Management

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Comments from our readers

On 1 March 2016 at 1:11 pm AFA Muggins said:
Gold is often chosen as a stable form of storing money, particularly in times of uncertainty. This is why Central Banks seem to be hovering it up, and the likes of Goldmann Sachs tell clients to sell gold as they get record deliveries of purchases made by the organisation.

If gold is simply used to store purchasing value in deflationary and inflationary environments, it seems punitive to be taxing.
As gold is traded against U.S. dollars, I wonder if the IRD has seen the opportunity to also tax ongoing, based on movement of USD/NZD against physical gold as well.
As fiat money is worthless people will try and move their assets base. Looks like the system doesn't want that happening.

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