Kyoto Koto. Welcome to Shared Lunch. My name is Gus Watson, investments lead at shares Z. Today we're going to look at tax on foreign investment funds, also known as fIF tax. If you have over fifty thousand dollars invested internationally, this explaining episode is something you should listen to to make sense of it all. I'm joined by Hayden Clark from
ID and Ross Nelson from PwC. But before we start, I need to tell you that the tax comments in this podcast are general in nature and for educational purposes only. We recommend you confirm or seek tax advice on how the TAXTA applies to your situation. If you're unsure it.
All, investing involves a risk you might lose the money you start with, we recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest. Everything you're about to see and here is current at the time of recording.
Thanks for being here, guys. fIF. It's this weird acronym. What is fifth? What does it mean? Right?
So the fifth rules is really the short term for the foreign investment fund rules and it's one of the key sets of rules that applies to outbound investment from New Zealand into foreign companies, particularly outbound investment into foreign companies that aren't controlled by New Zealand residents. And so that means they cover your typical scenario where you've got a New Zealand resident investing internalfshore listed company where they just have a portfolio interest of less than ten percent.
And one of the things that these rules are intended to do is to ensure that those outbound investments in foreign shares are taxed consistently, including where, for example, the foreign company doesn't pay out a dividend.
As an individual investor, how do I know if the fifth rules are relevant to me?
As Hayden said, the rules applied to investments in foreign companies, So if you've got an investment in a US listed stock or anywhere in the world, these rules are potentially relevant, but they also apply to foreign unit trusts. What they don't apply to I suppose if I just touch on that is cryptocurrency typically will not be subject to these rules, and there's some great id guidance around how your tax
on your cryptocurrency. They're not relevant to things like foreign bank accounts, foreign investments and property not relevant to your QI saver. So there's lots of things they're not relevant to. But yeah, if you've got investments in foreign shares, then they're generally relevant, but there are a couple of important carve outs to that.
Yeah, I understand that some of the AX shares they're not relevant for and the IOD website is the best place to check that.
That's right. Yeah, if you've got investments in Australian listed shares, then many of those are carved out. There's a specific exemption for them, but not all of them. So yeah, you do need a gain. The id's got a great tool on the website. You just go to that, put the ASEX ticker in and that'll tell you whether or not that share is exempt from the fifth rules or not. I suppose the other key exemption is the demonymous exemption, and that will be relevant for many people as well.
Can you explain what you mean by the deminimus exemption.
Where you've got a total shareholdings and fifth of less than fifty thousand dollars in New Zealand and that's a cost test, so you need to know what you've paid for these fifths. Then the fifth rules do not apply to you and your tax more or less as if they were an investment in a New Zealand listed company, for example, so you would be taxed on those investments
on any dividends you receive from them. We don't have a comprehensive capital gains tax in New Zealand, so for most investors you wouldn't be taxed on any gains you realize, although that's not always the case. If you're trading or purchase those shares with intention of sale, then you'd be taxed on them. But yeah, for most investors, if you're in the Deminymous exception, then you'll just be text on your diffendend income. It's a cost test of less than
fifty thousand dollars. A couple of things on that. If you are investing using various platforms or different portfolios with different brokers, you do need to look at all of your fIF interests in total. If you're investing jointly, if you're you might be investing with your spouse, then then you effectively you get one hundred thousand dollars deminimus because you're splitting that holding across across the two of.
You I'm an individual investor in Vision New zeal investor. I have been investing off shore. The things I've been at, the foreign investment funds I've investing in offshore aren't on the AX exemption tool. I more that costs me more than fifty thousand New Zealand dollars to buy these foreign investment funds. What I do now, like, how do I calculate my foreign investment fund income? How do I determine the tax that I might need to pay?
Sure there's a there's a number of different fifth income calculation methods, but by far and away the most too common ones are the fear dividend rate method and the comparative value method the CV methods, So FDR and CV are the two key methods. Under the FDR method, you basically you take five percent of your opening market value of your fifth portfolio and take five percent of that
and that is your fifth income for the year. Now that's the case irrespective of whether you're that that portfolio might have returned fifteen percent that year, your kind of income is kept at five percent. But in contrast, if you know if it's a bad year and that portfolio has made a loss or a gain of less than five percent, you still have that deemed return of five percent under the FDR method. There is a little rinkle
to the FDR method as well. If you happen to be buying and selling fifths within an income year, then there's something called a quick sale calculation. So if you are doing that, there's a little bit of a complexity. You just need to navigate where you need to calculate the gain you make on that trade. But again is a five percent cap, so you're a little bit of a wrinkle if you are sort of trading within within an income year.
Can I replay that one back to you? So the FDR method our first method. At a high level, I look at the value at the start of the period, I multiply it by five percent, and that's my fifth income correct.
The FDR method is available to all investors effectively, So if you were a New Zealand listed pie, the New Zealand listed pie would be applying those FDR rls to calculate its return on interests that that vehicle might have invested into as an individual or for certain trusts in New Zealand. You also have the ability to use the CV method under the CV method, It basically calculates the
market value movement of your portfolio for the year. So and for what For most investors, what you would do is calculate your income under FDR, calculate your income under CV, and each year you have the option of choosing the
lower of those two. So in the scenario I described earlier, where your portfolio had performed poorly, under FDR, you would have a deemed return of five percent of the opening market value, but under CV, your actual market value movement was less than five percent, or in fact, if you made a loss overall, then you'll pay tax on that lower amount where it's where it's a loss, you don't get to claim the loss, but you'll return NOL income
on your portfolio under the CV method. Just one last thing I should say on that is that there is a consistency requirement. So if you have you know you need to use the same method for your fifths in an income year. So you can't sort of choose you CV for this loot over here because it suits you and use FDR on this lot. You need to use one method consistently within an income year, but you can switch and change between FD FDR, and CV between different income years, or.
The decision for most of our shares investors whether do I want to go FDR or do I not to g CV. So something that we actually offer shares investors at the moment as a download or report, so it gives the data or the inputs so they can do the calculations to determine their ZV income or the FDR method income. It's a downloadable sis the report or we
also offer a integration to share site plug in. We share them a month of your trading data and it prints out those two numbers and then you can make that call about whether you want to use a CV approach or the FDR approach. So summarizing going back through, so we realize we're a fifth investor because we have more than fift New Zealand dollars offshore. We've now done our CV income, our FDR income, and we've decided that
we want to go with the FDR income approach. Let's say, so, how do we go about paying text now that we know this number? Hayden right.
So obviously the thing to do is to include the fifth income in your income tax return, and so you would go into my IR and load up the return for the air and include your fifth income. When it comes to fifth income, you may be entitled to claim some tax credits against that income. For example, if you receive a foreign dividend and the foreign country has withheld withholding taxes, you'll be entitled to a foreign tax credit
in relation to your fifth income. But there are some limitations in claiming foreign tax credits, so it's always good to check the id guaridance to see if you're entitled to the foreign tax credit and the amount you're entitled to. Then, in addition, in relation to the dividend, Chazis may deduct withholding tax and that's resident withholding tax from the dividend, and you're entitled to claim a tax credit for that
resident withholding tax in your return as well. The difference between a foreign tax credit, though, and the resident withholding tax deducted by chair Zis is that resident withholding tax is actually a refundable tax credit. So if it turns out that the tax payable on your fifth income is greater than the foreign tax credit and the RWT combined, you'd be able to get a refund of the excess IRWT.
If I suppose you realize that you'd not return fifth income in a prior year when you should have the best thing to do then would be to write into inland revenue, telling them about it and making what's called a voluntary disclosure. And so again you can do that through my IR by logging into the system and asking in the revenue to adjust the return. And when you're asking for an adjustment, it's really important to provide a work paper explaining how you've culculated them out that you're
planning on adjusting to. And also to bear in mind that you may have mistakenly included your dividend income and your return by mistake, so you're not just asking to include the fifth income, but you're also asking them to take the dividend income out the return, and so there's actually a need adjustment that you're asking for. So including all that information and making the voluntary disclosures helpful.
There's a few things that remember in terms of types of income. What happens with dividend income.
Well, yeah, under the FDR method, you don't look at dividend income. Under the CV method, there is a formula. So I said before that you're looking to work out the market value movement on your portfolio. It's basically looking at the overall economic return. So there's a CV formula that you need to work through. Your dividends form part of the gains for a particular year, so you would need to look at that if you're applying the CV formula.
But one point to remember that with all of these methods, So with the FDR method and the CV method, once you've calculated your income for the year and returned to that income to inland revenue, that that is the only income that you need to return on those fifths. So if you subsequently make a gain at a later date, you will not be taxed on that gain. If you subsequently receive a dividend, then you're not taxed on that.
You just have to return your fifth income under one of those two methods each year, and that is that is the only income that you need to return in relation to those fifths.
Of investors out there, we're interested about how they're going to be able to do these calculations. Is there any kind of tools that you can point them to that can help them with this process? Hayden, Yeah, sure.
So you've already mentioned the AX exemption tool. So that's available in an n Revenues website just by googling asx fifth exemption. There's also a fifth income calculator on a THEN Revenues website which which can be helpful if you're trying to work out both your fifth FDR income and CV income and all that you need to use that
tool is your transaction details during the year. In addition, there's also a Foreign Investment Fund income guide available on the n THEN Revenue website that's called the IR four six one, So you could google IR four six one or IID Foreign Investment Fund Guide and both of those searchers will pull up the guide for you.
Yeah, just for those the shares of investors out there, we do provide the day on transaction history which can be used to educate or to input into the IRR fifth tool calculation tool. And as I mentioned before, we have also had the Shares Share Sarte integration and they can do the calculations for you. So we've got that dry approach or you can outsource it. And I understand you can do a one month fee for the share site report as well, and from there my IR for
the submitting to the ID. So we have a lot of investors on shares these that are already over the fifty k threshold and will be sit under the fifth rules. However, we also see a lot of investors that are growing their portfolios and we'll be close to that fifty k mark very soon. Ross what should they be thinking about?
You know, I guess it's important if you're close to that fifty k mark to really just check and see where you are at. If the cost of your fifths exceeds or is fifty thousand dollars or more New Zealand and any any point in the income year, then you will be subject to the fifth rules. It is only fifths that are subjects to rules that come within the
fifty thousand dollars you're measuring. If, for example, you have investments in Australian listed stocks that are exempt, they don't come into the fifty thousand dollars, so you can exclude those.
If you do, say, have fifths with a cost of fifty two thousand dollars in a year, that means that all of your fifths are going to be subject to the fifth regime, don't You don't sort of get the first fifty thousand dollars free if you're if you exceed that fifty thousand dollars mark, then all of your fifths will be taxed using the fifth regime in that year.
Just a local example, please, where have a lot lot of investors that say invest in a smartch is SMP fund? Would that be a fifth fund?
To work out whether a lot of fund is a foreign investment fund, what you need to look at is where the fund itself is resident. So my understanding is the smart shares funds actually New Zealand resident funds, So you're investing into a New Zealand entity, so the foreign investment fund rules won't apply. It doesn't matter that the fund is investing itself into foreign shares that that's not what you're looking at. You look at where the fund is resident.
Thank you both, really appreciate your time and thank you from on behalf of our investors as well. Thank you. Thanks once again. Tax is very individual and it's always best to see tax advice from your accountant or advisor if you're at all on shore. Martyr Wa