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This article is not tax advice. I am not your tax advisor. The article below is the the opinion of the writer and is for entertainment purposes only. Consult your own tax professionals if you need assistance filing your tax return.
Around 2008, the IRD decided to start taxing foreign investments differently to domestic ones.
The FIF taxation scheme was brought in which taxed overseas shares much more aggressively than before.
I was actually working as a Chartered Accountant at the time it was implemented and it caused quite a stir in the industry.
It was (apparently) to discourage investment in overseas sharemarkets and keep investor money in New Zealand and Australia, by making the tax rules more burdensome for foreign investments.
The scheme has stayed mostly unchanged since then and looks like it's here to stay.
A foreign investment fund (FIF) is an offshore investment that is:
This means if you own any overseas shares, such as US listed shares, S&P 500 index funds or anything not listed in Australia/NZ, you could be liable for FIF tax.
If you have looked over the FIF rules and had your mind boggled, don't worry.
I used to work in a large multi-national accounting firm and probably 90% of the accountants there didn't understand it either.
However, with a basic understanding of the stock market, the rules are not too hard to follow with some explanation.
In this guide, I'll go through the basic tax guidance and some examples to help you understand your tax responsibilities.
Thankfully there are some exceptions.
You are exempt from FIF taxation if:
If you don't satisfy these exemptions, you will be required to calculate your taxable FIF income and declare it in your tax return.
Keep in mind that your foreign based ETFs that trade on the ASX are not exempt from the FIF regime.
Because the underlying holdings in these ETFs are not Australian resident companies and do not maintain franking accounts, they do not satisfy the exemption rules and are not listed in the exemption list.
This means if you have invested in S&P 500 ETFs or other foreign ETFs listed on the ASX, they will contribute to your $50,000 cost threshold for FIF.
Whenever in doubt, search for the ticker in the exemption list and ensure it's there.
If not, you will need to include them in your FIF calculations.
You have five different options for calculating your FIF income.
In this guide, I will only be covering the first two (FDR and CV).
The other three seem to be reserved for special situations, and I can't recall any client ever using them.
The Fair Dividend Rate is reasonably simple to calculate.
Your taxable FIF income is simply 5% of the opening value of your FIF portfolio.
You will also need to account for "quick sale" gains, which applies to any shares you buy and sell within the same income year.
Tim buys $50,000 NZD worth of Apple (AAPL) during the year.
(500 shares at $100 NZD per share)
As Tim's FIF portfolio now exceeds a cost $50,000 NZD, he becomes liable for FIF tax this year.
At the end of the tax year (31 March 2022), Tim's Apple stock is worth $55,000.
For the 2022 tax year (1 April 2021 to 31 March 2022) Tim's FIF movements will be as follows:
Opening market value | Buys | Sells | Closing market value |
|---|---|---|---|
$0 | $50,000 | $0 | $55,000 |
Using the FDR method, Tim's tax liability will be as follows:
Market value at START of the year: $0
FDR = 5% of opening market value = 5% of $0
FIF taxable income = $0
Tim buys an additional $10,000 in Apple stock during the year.
(80 shares at $125 per share)
He does not sell any stock.
However, Apple stock falls sharply in value during the year.
He also receives a dividend of $150 during the year.
At the end of the tax year, Tim's Apple stock is worth $30,000.
For the 2023 tax year (1 April 2022 to 31 March 2023) Tim's FIF movements will be as follows:
Opening market value | Buys | Sells | Closing market value |
|---|---|---|---|
$55,000 | $10,000 | $0 | $30,000 |
Using the FDR method, Tim's tax liability will be as follows:
Market value at START of the year: $55,000
FDR = 5% of opening market value = 5% of $55,000
Since dividends are not taxable when using FDR, he does not need to declare his $150 dividend.
FIF taxable income = $2,750
Tim will need to return $2,750 of FIF income in his personal IR3 tax return, and pay tax on it at whatever his personal tax rate is.
Tim buys an additional $10,000 in Apple stock during the year on 1 January 2023.
(200 shares at $50 per share)
He does not sell any stock.
Apple stock price falls slightly during the year.
At the end of the tax year, Tim's Apple stock is worth $35,000.
For the 2024 tax year (1 April 2023 to 31 March 2024) Tim's FIF movements will be as follows:
Opening market value | Buys | Sells | Closing market value |
|---|---|---|---|
$30,000 | $10,000 | $0 | $35,000 |
Using the FDR method, Tim's tax liability will be as follows:
Market value at START of the year: $30,000
FDR = 5% of opening market value = 5% of $30,000
FIF taxable income = $1,500
Tim will need to return $1,500 of FIF income in his personal IR3 tax return, and pay tax on it at whatever his personal tax rate is.
Notice how even though the market value is under $50,000, he is still liable for FIF tax because the cost of his portfolio is still $50,000.
Tim currently owns 780 shares of Apple.
He sells half of his Apple stock during the year for $15,600 (390 shares at $40 per share).
He has 390 shares left.
At the end of the year, Apple stock rises sharply and finishes the year at $150 per share.
His remaining Apple stock is worth $58,500 (390 x $150).
For the 2025 tax year (1 April 2024 to 31 March 2025) Tim's FIF movements will be as follows:
Opening market value | Buys | Sells | Closing market value |
|---|---|---|---|
$35,000 | $0 | $15,600 | $58,500 |
Using the FDR method, Tim's tax liability will be as follows:
Market value at START of the year: $35,000
FDR = 5% of opening market value = 5% of $30,000
FIF taxable income = $1,750
Tim will need to return $1,750 of FIF income in his personal IR3 tax return, and pay tax on it at whatever his personal tax rate is.
Since he's sold some shares, we now need to recalculate Tim's cost basis to see if he's still liable for FIF.
His largest holding was 780 shares.
For those shares he paid $70,000 ($50,000 + $10,000 + $10,000).
Therefore his cost per share was:
$70,000 / 780 = $89.74 per share.
This means the cost of his remaining Apple 390 shares is:
$89.74 x 390 = $34,998.
Because his cost basis is now less than $50,000 NZD, Tim will not need to declare FIF income next year.
If you buy and sell shares within the same year, you need to account for quick sale gains.
Quick sale gains are basically another word for capital gains, or buying and selling for a profit.
Let's redo part of the example above, but add in a quick sale.
Quick sale gains can be calculated via the "peak holding method" or the actual gain.
We'll go through both in the worked example below.
Tim buys $50,000 NZD worth of Apple (AAPL) on January 1 2022.
(500 shares at $100 NZD per share)
As Tim's FIF portfolio now exceeds a cost $50,000 NZD, he becomes liable for FIF tax this year.
During the year, Tim also buys $15,000 NZD of MSFT stock.
(100 shares at $150 per share)
Before the year ends, he sells half his MSFT stock for $10,000.
(50 shares at $200 per share).
At the end of the tax year (31 March 2022), Tim's Apple stock is worth $55,000 and Tim's Microsoft stock is worth $10,000.
For the 2022 tax year (1 April 2021 to 31 March 2022) Tim's FIF movements will be as follows:
Stock | Opening market value | Buys | Sells | Closing market value |
|---|---|---|---|---|
AAPL | $0 | $50,000 | $0 | $55,000 |
MSFT | $0 | $15,000 | $10,000 | $10,000 |
Using the FDR method, Tim's tax liability will be as follows:
Market value at START of the year: $0
FDR = 5% of opening market value = 5% of $0
FDR taxable income = $0
We need to work out our quick sale gains using both the peak holding method and the actual gain method.
Peak holding method:
While this looks like IRD is just complicating things for fun (which they kind of are) this isn't too hard to calculate and it actually works in your favour reasonably often.
The quick sale relates solely to the stocks bought and sold within the same tax year.
In this case, this means it relates to Tim's Microsoft shares only.
First, we need the average cost of the shares.
Since he only bought one parcel, that's easy - his average cost is $150 per share.
Now we need to work out the two peak differentials.
Greatest shareholding in the year = 100
Shareholding at start of year = 0
Differential = 100 shares.
OR
Greatest shareholding in the year = 100
Shareholding at end of the year = 50
Differential = 50 shares.
IRD says we are allowed to use the lesser of the two, so in this case we'll use 50.
The formula given to us is:
5% x peak holding differential x average cost =
5% x $50 x 150 = $375.
Actual gain method:
The sale of stock was for 50 shares at $200 per share.
We've already worked out the average cost which is $150 per share.
Therefore he made $50 per share on 50 shares, for a gain of $2,500.
Since we are permitted to use the lesser of the two, we will use the peak differential method and declare $375 as our quick sale income.
So Tim's total FIF income will be:
FDR taxable income = $0
Quick sale income = $375
FIF taxable income = $375
You also have the option to calculate your FIF tax liability using the CV method.
If it works out lower than the FDR method, you are allowed to declare the CV method amount and lessen your tax liability.
Tim owns $100,000 in Apple (AAPL), $100,000 in Microsoft (MSFT) and $100,000 in Tesla (TSLA).
To work out his FIF tax liability under the CV method, we simply need to compare the market value of his FIF portfolio at the beginning of the year and the end of the year.
Stock | Opening Market Value | Closing Market Value | FDR Income | CV Income |
|---|---|---|---|---|
AAPL | $100,000 | $102,000 | $5,000 | $2,000 |
MSFT | $100,000 | $110,000 | $5,000 | $10,000 |
TSLA | $100,000 | $80,000 | $5,000 | -$20,000 |
Total | $300,000 | $292,000 | $15,000 | -$8,000 |
Let's also assume he received $10,000 in dividends during the year.
His FIF tax liabilities will be as follows:
Formula = Opening market value x 5%
(Dividends not taxable)
$300,000 x 5% = $15,000 taxable income.
Formula = (Closing market value + gains and dividends) - (opening market value + costs)
$292,000 closing MV + $10,000 dividends = $302,000.
Opening MV = $300,000.
$302,000 - $300,000 = $2,000 taxable income.
In this particular tax year, Tim should calculate his tax liability using the CV method, and return $2,000 of FIF income in his IR3 tax return.
You are able to claim foreign tax credits (such as withholding tax deducted from your dividends) if New Zealand has a Double Tax Agreement with the country giving the tax credit.
The IRD is not crystal clear in their wording here, but it appears to mean you can only claim tax credits if you actual incur FIF taxable income.
For example, if you use the CV method and incur a loss, you cannot claim any tax credits.
If you use the CV method and you have FIF taxable income, you can claim the tax credits.
Interestingly, since dividends are not taxable under the FDR method, one might assume that you cannot claim dividend withholding tax. However, in KPMG's summary of the FIF tax law, they state credits are indeed claimable:
Keep in mind the commentary above is one person's interpretation of the IRD FIF guidance.
This is not tax advice and you are encouraged to read the guidance yourself and make your own interpretations.
To ensure your taxes are filed accurately, you should seek the services of an accountant when preparing your tax return.
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