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Before you start capital raising, you need to be aware of the tax consequences you may face. The last thing you want is to receive is a surprise tax bill. In New Zealand, there is no tax on capital gains, such as when you sell your business. However, there are many other circumstances under which you need to pay tax. For instance, you may need to consider the tax consequences of raising capital through shares. This article will outline the tax consequences on share sales, assets, and grants and subsidies. 

Tax on Share Sales

Your startup may want to raise capital through equity capital. Usually, when selling shares, you will not need to consider tax valuations. Share sales are personal property and are not taxed unless the seller:

  • deals in shares; or,
  • originally bought the shares for resale and not as a long-term investment.

In these two scenarios, the profit from the share sale will be taxable, and you will need to include it as income in your tax return if you are the seller. Therefore, as a general rule, you will be classified as a share trader rather than a regular investor by the Inland Revenue Department (IRD).

According to the Income Tax Act, you can be liable for income tax on gains when:

  • you or an investor are dealing in shares;
  • shares were gained with the purpose of resale at a profit; or,
  • you or an investor enter into a scheme to profit from the shares.

IRD will look for certain behaviours to determine whether you or an investor are dealing or trading in shares, such as:

  • whether there is a pattern of frequent buying and selling shares over time;
  • whether you or the investor invest in significant levels of capital in investments;
  • if you or the investor monitor investment portfolios closely;
  • whether a lot of time is spent researching investments;
  • whether high-risk shares are bought to make a profit; and
  • if shares are bought and sold on a ‘revenue’ account instead of a capital account.

Tax on Grants and Subsidies

You may want to raise capital through grants or subsidies. This method is a great way to fund your business; however, it may create tax liabilities.

Whether you need to pay income tax on grants and subsidies depends on the type of payments and where you got it from.

For example, you will need to pay income tax on grants and subsidies if you:

  • receive a grant or subsidy where payment is based on your income;
  • receive a grant or subsidy for a business expense such as rent, vehicle costs, or insurance (however, this does not include government grants);
  • use a Work and Income self-employment subsidy for private expenses such as groceries; or
  • do not use all of a grant or subsidy, so the remaining amount goes into your startup’s general fund, which is taxable.

You do not need to pay income tax on grants or subsidies if you receive a grant or subsidy to help pay for capital assets that:

  • do not generate product income; or
  • will be used to produce gross income.

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Tax on Asset Sales

It is possible to raise capital by selling assets that your startup does not require anymore. Some asset sales will create a tax obligation, while others will not. These tax obligations will depend on the type of asset you are selling. 

Selling Fixed Assets or Intangible Property

Suppose you sell fixed assets or intangible property, and they sell for above their tax book value. In that case, you must include excess depreciation deductions as income in your tax return.

For example, if you are selling a building as a fixed asset, it is best to seek tax advice on whether you need to file any depreciation recovery income in your tax return. 

Selling a Financial Arrangement

When selling a financial arrangement, a wash-up calculation is needed to understand if there is any taxable income. To calculate this accurately, you should seek professional tax help. The taxable amount will depend on:

  • amount of income you had during the term of the financial arrangement;
  • how much you have declared in their tax returns; and,
  • what expenses you have already claimed.

Selling Goodwill

When selling goodwill, it can either be:

  • personal or business goodwill, which is goodwill attached to the business and dependent on relationships between the company and its customers; or
  • local or site goodwill, which is goodwill attached to the location of the business.

Taxable income will depend on the type of goodwill you sell. If the sale has both kinds of goodwill, some payments will be taxable, and some will not. Personal or business goodwill is usually not taxable as long as they relate to:

  • the reputation of the business;
  • established client base;
  • trade names, trade marks, and logos.

Meanwhile, local or site goodwill is usually taxable. This scenario can arise, for example, when you grant a lease to the buyer or assign your lease to them.

Payment for goodwill relating to the lease of licensed premises such as a hotel will be:

  • included as income in your income tax return; and
  • may be claimed as a business expense by the buyer if the asset comes under depreciation rules.

Land Sales

You may want to sell land your startup owns to raise capital. The land sale can be taxable if the land is bought:

  • for a business you run that deals in, develops, subdivides, or erects buildings on land; or
  • if you run a business that deals in, develops, subdivides, or erects buildings on the land, and land is sold within 10 years (regardless of whether it was for a business purpose).

Key Takeaways

When raising capital, there are some instances where you will need to pay tax on your profit. You need to pay tax:

  • on share sales if you are considered to be a share trader or dealer;
  • on grants and subsidies; and
  • when selling fixed assets, intangible property, financial arrangements, goodwill, or land.

LegalVision does not have tax expertise in New Zealand. However, if you need general legal advice for your startup, you can contact our startup lawyers, who can help you as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

Must I pay tax on a grant or subsidy I receive?

You will need to pay tax on a grant or subsidy if its payment is based on your income or for a business expense. Furthermore, you will need to pay tax on a Work and Income self-employment subsidy for personal needs, or if you do not use all the money from the grant or subsidy. 

Will I need to pay tax if I sell a fixed asset?

You will need to pay tax when selling a fixed asset if it is sold above its tax book value. You must then include the excess depreciation deductions as income in your annual tax return to IRD.

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