The crucial things with FIF/FDR taxation are:
1.This tax applies if you own non NZ based investments (apart from a small handful of exemptions in Australia).
2. If you own your investments in your own name, you have a de minimis exemption from the tax for the first $50,000 of cost price of overseas investments. If there are two of you, then the de mnimis exemption is $100,000 (ie your allocations are joined).
3. Below this level you are taxed on overseas dividends received. Above this level you can choose between different ways to calculate the tax owing - whichever is most favourable to you, and you are no longer taxed on overseas dividends received.
4. If your assets are owned by a Trust or Company or other entity, there is no de minimis exemption.
5. The de minimis exemption is based on the cost price on 1st April of each year.
6. If you owe tax, you need to pay it to the IRD after your tax return is completed.
7. It is VITAL that you and your advisers are aware of all of your investments, so that they can ensure that you do not mistakenly operate under the wrong basis (ie declaring that you are eligible for the de minimis exemption when you are not.)
8. If you are in doubt - we recommend that you discuss this with an accountant. We can refer you to an excellent, cost effective accountant if you wish. Email us for a referral on firstname.lastname@example.org.
Investment Income Taxation (more detailed information).
The taxation of investment income rules changed from the 2008 income year. These changes were designed to smooth out several existing anomalies, but are quite complex. The following provides a summary:
The new rules apply principally to international equities. These investments will be subject to a new Fair Dividend Rate (FDR) tax calculation, unless they qualify for the following exemptions/exclusions:
- If you own more than 10% of the foreign company or entity that is resident in a grey list country (i.e. Australia, the US, the UK, Canada, Japan, Germany, Norway and Spain) and you are not investing via a NZ managed fund or life insurer (i.e. a direct investment).
- If the total cost of all your equity offshore investments is NZ$50,000 or less (or $100,000 for a couple). This is called the ‘de minimis calculation’. Please note this is a threshold and does not apply to most family trusts (so the FDR will apply from your first dollar invested for trusts and for those individuals who breach the threshold). If you are unsure as to how to calculate the cost, we can provide you with assistance in this area. In calculating the NZ$50,000 threshold exclude all cost of offshore equity investments that are exempt from the FIF rules
- Holdings in Australian-resident companies (which are listed on an approved ASX index and maintain a franking credit account).
- Australian Unit Trusts (AUTs) that provide a Resident Withholding Tax (RWT) facility and meet certain other criteria. If you have AUTs, we can talk this through with you.
- There are certain other exemptions including GPG, New Zealand Investment Trust and venture capital companies.
- Investments in New Zealand tax resident unit trusts are excluded from the $50,000 de minimis calculation (even if they invest in international shares).
- Fixed rate shares, non-participating redeemable shares, in foreign companies.
- An interest in a non-resident company (fund) which invests 80% or more by value of its assets (directly or indirectly), fixed rate shares, or financial arrangements (principally debt instruments or derivatives) that are denominated in NZ dollars or that are hedged to NZ dollars, or is determined by Inland Revenue as debt in economic terms.
- Where the IRD has made a determination for that product that FDR won’t apply (refer to IRD website: http://www.ird.govt.nz/technical-tax/determinations/other/) and where it is not practical to use FDR (e.g. where the market value of the assets cannot be determined).
Any investments that fall within the exclusions above (except for the last 4) will generally be taxed under the existing rules where investors are taxed on dividends only, unless the shares were acquired on a revenue account basis (i.e. if the IRD deems that you are a trader).
In respect of the last four exclusions, in the case of the former, the investments will be taxed under the comparative value method (i.e. annual change in market value plus distributions) and in the case where FDR is not practical, the cost method can be applied.
How does the Fair Dividend Rate work?
If your investments in international equities do not qualify for an exemption as outlined above, you will be taxed each year on a maximum of 5% of the opening market value of your offshore share investments, plus a Quick Sale Adjustment (QSA - if you buy and sell shares during the year). If you are an individual or family trust and the total gain (dividends and capital gains) on your offshore share investment portfolio is less than 5%, tax is payable on the lower amount, with no tax payable if the shares make a loss.
For example (please note this example assumes there is no QSA during the year and the investor is an individual or family trust):
|Value of qualifying international shares as at|
|Value of qualifying international shares as at|
|Dividends received||Total gain||Taxable income||Tax payable|
(for a 17.5%
(5% of $100,000)
So why is this positive?
- Any gains you receive over 5% are effectively tax free (in the first example this is $20,000).
- If you are an individual or family trust investor and you make a loss, you will not pay any tax (although you cannot carry the loss forward or claim a deduction).
- In most cases, you will have certainty of your overall tax liability at the start of the year.
- Overseas dividends are no longer taxable by themselves.
- Previously, if these investments were held in a non-grey list country (‘grey-list’ refers to a list of countries including the UK, Australia and Canada which previously only qualified for a special exemption on capital gains), your entire gain would have been taxable.
What about managed funds?
The tax changes have really enhanced the appeal of certain managed funds. These funds are the ones that have registered as Portfolio Investment Entities (PIEs).
The PIE will pay tax on behalf of the investor based on the investors’ Prescribed Investor Rate (PIR) capped at 28% (i.e. either at 17.5% or 28%). The tax treatment of FDR assets of a PIE is not based on the opening market value, but the average daily opening market value (plus any QSAs).
Managed funds that register as PIEs (some will continue to be taxed as they are currently) will deduct tax on your behalf if you have elected a tax rate greater than 0% (this will apply to individuals or a family trust who elects to have tax deducted at 30%).
PIEs that invest into Australasian equities (New Zealand equities and qualifying Australian equities) will not be taxed on capital gains and will only be taxed on dividends.
The changes effectively mean there may be fewer tax advantages in investing into direct equities over using a managed fund. PIEs provide an excellent tax effective method of investing going forward.
By Carey Church