Warning to DIY investors investing in foreign investments

Warning to DIY investors investing in foreign investments

New Zealand is a nation of Do It Yourselfers.  From the queues at Mitre 10 and Bunnings, to people managing their own investments because they can do it better than a professional.

Although we DIY our gardening and some minor garden building projects, we do tend to disagree on the ability of most people to build a well diversified and well performing investment portfolio without professional help.

A recent NZ Herald article highlighted the risks of DIY investing, when an investor had a $2,000 tax bill (1/3 of the value of his investment) when the ETF that he was investing in was wound up and repaid to him.  His broker - ASB Securities stated that they had a policy not to advise their clients of corporate actions (ie the wind up) when the clients had no choice in the matter.  From our perspective that is an interesting position.

While Moneyworks clients tend to invest mainly in non ETF's and managed funds, we are regularly communicating with our clients about corporate actions - a number where it is just 'for your information.'

While we are not tax experts, we work hard to ensure that the taxation implications of the investments that our clients hold do not disadvantage them.  Looking at this particular person's situation it highlights two things - 1. how important it is to have a well diversified portfolio and 2. to either fully understand all the taxation rules, or work with a professional that can advise you (along with an accountant) on how the Foreign Investment Fund regime works.

The NZ Herald article is available below for you to read.  Warning to small-time foreign share investors as man loses a third of his investment in tax.

A follow up column in the NZ Herald by Mary Holm added the following comments on investing in foreign ETF's:

While it is easy to buy and sell US and other international shares at the click of a button, investors do not often consider how they will reclaim their investment if something goes wrong with the offshore investment.

Moneyworks notes - if you have less than $50,000 purchase price per person in NZ dollar denominated investments, then you are likely to have an exemption from the FIF tax regime. You will then be taxed on your overseas dividends (which the wind up the company was treated as for the investor in the NZ Herald article). 

If you have over $50,000 cost price at any time in a tax year, or you are investing through a Trust or company your tax will move to be taxed under the Foreign Investment Fund (FIF) and Fair Dividend Rate (FDR) rules.  If you are not investing through a WRAP platform, this can become a time consuming exercise in monitoring your investments, and income and sorting out your tax.

This is certainly one of the areas in life where investing through a professional can be worth the fees that you pay.


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