Jorda and welcome to this episode of Shed Lunch, where we delve into the often vexed subject of tax.
Yes, that's right.
We're going to do a one oh one on what it means to invest in individual companies and funds and to keep it as simple as we can. I'm joined by Mark lash, a partner with Deloitte.
Private investing involves 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 hear is current at the time of recording.
Welcome to studio Mark, Thanks Allen.
Now, tax for most of us, I know it's your every day, but for most of us it's a tricky subject. Why do you think it is.
Well, tax is very spac specific and there's a lot of complexity in the rules that we have in New Zealand. And some of those rules are relatively simplistic at the at the simple investment end, and some of those rules are incredibly complex when we start to get into things
like foreign investment funds and investing in those. So it's always important I think to you know, to remember that because text is specific, you've got to be too careful to ensure that the that you take advice where that is appropriate, and ensure that a lot of the advice that's actually written in terms of iety commentaries and the like of your generic right, so they are intended to
be guides, are not necessarily specific advice. So our recommendation to clients is always to take specific advice where they need to take that advice, and to be very careful around ensuring that they don't just rely on generic comments.
What about AI, there's a lot of chet GP text kind of questions you can throw in and get all sorts of answers.
What's your experience there.
I think AI is probably in its infancy at the moment, so you do want to be a little bit careful about you what you are relying on. Ultimately, Lee, in New Zealand, it's up to the individual taxpayer to ensure that their tax positions are correct, and so it's so important that they do take advice in the right way
or rely on the right type of information. My experience is that tools like chat GBT are credibly useful tools, but you do need to be careful that they provide you just with generic comment rather than specific advice.
Okay, so let's think about the retail investor then, what would be the things that they need to consider. I mean, you can have dividends and you can have share gains and losses. Obviously, what does a retail investor need to think about?
Yes, at the end of each year, a retail investor needs to ensure that they have appropriately accounted for the income that they've received from their investments, whether it's interest or dividends that they've received, and those need to be brought to tax and any sort of square up amounts dealt with with inland revenue. It's also appropriate for investors to stand back and reflect on the nature of the
activity that they've can do during the year. So we don't have a comprehensive capital gains tax in New Zealand, but we do tax gains from investments where those investments have been purchased for a dominant purpose of selling them if they are part of a business activity or share trading activity conducted by that person. So we do recommend that people stand back at the end of the year and have a look at what they've done from an
investment activity. Point of view and reflect on whether or not they might have some concerns that Inland Revenue might view them as as being a trader in business or having acquired those investments for a purpose of disposing of them.
Mark with platforms like Shaersy's, we deduct the tax from the distributions for most, not all investors. But it would be fair to say that investors can't just set and forget. There are obligations that they have under tax, aren't.
They Absolutely so, As I mentioned before, the obligation to ensure that the tax appropriate tax has been paid does fall on the relevant investor. It's it's not Chazy's responsibility. And if the investor hasn't got it right, then Inland Revenue will will be in contact. I think you know the things that Chas's and other platforms do you know, do the services they provide do issis greatly if you like,
in terms of ensuring that tax has been withheld. Ideally, it it ensures that for most investors they're not going to get a nasty surprise come come the end of the year. But in some instances, when a conservative approach is taken around, you know, withholding, it can actually mean for some investors that they are actually entitled to refunds of amounts because in New Zealand we do we do tax people on a on a marginal rate basis. So what that means is that as people earn more, their
tax rate progressively increases. So you know, if a flat rate of thirty three percent tax has been deducted, that could be well in excess of, for example, tax rate applying to a twelve year old student. Yeah, who's only got a ten and a half percent tax rate, So there could be refundaments that are available.
Let's unpack the difference between if I invest in an individual company or if I, say, want to invest in a managed fund or an exchange traded fund, what's the tax treatment? Because I understand one could be more effective than the other.
Yes, So with most managed funds and exchange traded funds, they are wrapped up in a product that we refer to as a portfolio investment entity or pie. With a pie, they typically take care of all of the tax on behalf of the relevant investor, so investors don't then need to include their income from those investments in their personal
tax return. The way that works is that the investor is required to notify the PIE of their prescribed investor rate, which broadly equates to what their margin digital tax rate would be on that investment income. The PIE in that instance then ensures that the relevant tax is deducted and paid within the PIE on behalf of the investor and pays out the tax paid return to the investor. So in those situations, investors are not required to include that
income in their tax return. Now, the maximum pier that can be elected is twenty eight percent, So for investors that are subject to twenty eight to thirty three or thirty nine percent marginal tax rates, using a or investing into a PIE can can generate a more advantageous tax outcome. If we can compare that with investing directly into a company. Then typically dividends from New Zealand or Australia and the like are then subject to tax at the marginal rate
of that particular investor. So if you have a tax rate of thirty three you're thirty nine percent, then that is the rate of tax that you will pay on that investment. So you can see if you were to be able to have an equivalent investment in a PIE that could be kept at twenty eight percent rather than
those high rates. It's really important in that context for investors to ensure that they have notified of the correct pir that applies to them so that the correct amount of tax can be deducted by the pie and an event that you get it wrong, that can sometimes lead to adjustments being made by a land revenue and compliance costs as you sort that out whether you've underpaid or overpaid in that particular instance.
Are there penalties that iod hands down? If your light sounds quite dracony and saying like that, but you know if you aren't paying the right amount of tax?
I mean, it obviously.
Depends on the individual and the amounts involved. But is there straight penalties that we know of?
There are? There is a whole penalty regime that exists within the Income Tax Act where where you know not the correct amount of tax is not being paid at that at the correct time. In our experience, thus far, inland Revenue hasn't taken a hard line, if you like, in relation to a failure to elect the correct rates. It's more been focused around ensuring that the top up or catch up amount of taxes collected and that the correct pr is applied going forward.
Is there a hunch though, that a number of investors maybe aren't applying the correct or paying the correct tax.
Yeah, Inland Revenue's got quite sophisticated in and around how they manage these types of things now and do have a number of tools that they can use to ensure that they are matching the correct pr to the relevant taxpayer. Our experience is that it's less likely that people are going to be able to sort of game the system by having the incorrect rate.
There's lots of jargon with tax it would appear now often we hear about imputation or franking credits. I think victation as New Zealand franking is often if you are invested in the AX or the Australian share market, can you explain to us when they come in to be You're quite right.
Imputation credits and franking credits are in essence the same thing, but just ones in New Zealand credit and the others are an Australian credit. The underlying concept around it is that when a company makes makes a profit, it has to pay some tax, and that tax that the company pays should be able to be passed through to the shareholder for them to claim as a credit. So in New Zealand, the company tax that is paid generates an
imputation credit that the shareholder can claim back. In Australia, the company tax paid generates a franking credit that an Australian resident shareholder can claim back. So if a company makes one hundred dollars a profit, it has to pay
corporate tax of twenty eight dollars. That same one hundred dollar a profit also gets taxed in the hands of the shareholder when it's distributed, but the shareholder is able to claim back that twenty eight dollars company tax that's already been paid as an imputation credit.
When does that happen though? So if I in my tax return, am I? If I see the word gross dividend? Is that one hundred dollars? But actually I then get some money back?
Yeah, So the gross dividend concept is recognizing the cash that's been paid to the investor together with the imputation credit that is attached to that dividend, plus any withholding tax that's been deducted. So it's that gross amount that is required to be put into the investor's tax return or tax calculation that's then subject to tax at the tax rate of the investor, but then you can claim
a credit against that tax. And the credits that you can claim are the imputation credit that's been attached and also any withholding tax that's been deducted, and if there is an excess amount that can sometimes be refunded.
So if I'm investing into Australia, then I want to be tax efficient or as efficient as.
I can be.
I need to keep an eye on those franking credits and percentage thereof.
Yeah, I think it's always important to start with tax.
Shouldn't be the tail wagging the roll, you know, you should always start with a sound investment plan, diversified investment portfolio, which as well outside my area of expertise naturally, but it is useful to just sort of keep an eye on the way in which the taxation rules might apply to the different types of returns that you're receiving from from your investment portfolio, and certainly in the case of Australian investments into Australian company, it's important to just keep
in mind those ones that are that are paying a franked dividend and those that are paying an unfranked dividend, and the reason for the subtle difference is that if the dividend coming out of Australia is not fully franked,
then it'll be subject to withholding tax. Those withholding taxes are able to be claimed as a credit in New Zealand in most circumstances, so sometimes you can get sit as subtle differences in the after tax return or the effective tax rate that comes from investing into Australian entities.
What about dual listed companies, We've got quite a few obviously on chess. Would it be more tax advantageous if you like to invest in the New Zealand share market as opposed to the ASEX for them.
Well, typically from a tax perspective, it shouldn't make any any difference in the sense that a New Zealand company that's registered on the Australian Australian Stock Exchange is still in New Zealand company still will be paying if you like a New Zealand dividend with imputation credits, So those sorts of things shouldn't necessarily influence a New Zealand investors' decision.
One of the things that investor might look at is that if an entity is dual listed, is whether that's because they are deriving income from both New Zealand and Australia, and whether there might be subtle differences in the way that that company pays to it and such that they're able to, if you like, provide imputation credits to New Zealand investors and franking credits to Australian investors, because because neither of those credits are able to be claimed in either country.
One thing mark too, that often comes up is you can merely go along investing and you get your dividends and your tax is all deducted and hopefully everything's happy.
But is there a time when investors really need to be thinking.
About or is there extra that I should be telling the IID And I'm assuming that.
When you look at an entire.
Portfolio that might have property, it might have other assets. I'm talking beyond say you're Cheesy's portfolio.
Yes, so if you're not a natural person, so companies and trusts are all required to file a tax return for natural persons. You've sort of got two different pathways that you end up going down. The first is the sort of the simplified approach, which is any sense a
letter of assessment by inland revenue. So if Inland Revenue believe that if all of the income that the individual has received has been taxed largely its source in New Zealand, so for example, sellaring wages subject to PYE investment income that's been subject to withholding tax or imputation credits in
New Zealand. And if Inland Revenue believes that that's the sole sources of your income and they have most of that information necessary to do a calculation of the assessment for the year, then for those individuals, they'll receive this letter of assessment and their responsibility is to review that, to check that and to make sure that it's right. If it's not right, there's an obligation to notify a
land revenue changes. There is a little sort of deminimous rule there around other income that's sort of less two hundred dollars or less. So if there's an amount that's missing from that assessment and it's two hundred dollars or less, then there is no requirement to notify in Land revenue of that fact. If an in revenue doesn't believe that it has all of that information necessary to do that assessment.
Then individuals will be required to file an IR three tax return, and that could include things like there's overseas income, there's income subject to the under the fIF or Foreign Investment Fund rules. There could be rents from property, there could be tax losses, there could be income from self employment, those sorts of things.
That's a nice segue to investing offshore. And I don't so much mean Australia, but perhaps the US, which you know, we have a lot of companies on Cheesy's that are US based investing there. Things get a little bit different, don't they with the I think the FAF is the kind of the acronym that's everywhere.
If you can explain that for US.
I'll certainly have a go. So the Foreign Investment Fund regime is intended to capture all foreign investments, particularly or traditionally into companies. There is Australia is actually caught within the context of those rules. However, because of our close economic relationship with Australia and the fact that a lot of New Zealanders invest into Australia, we have what's called
a Foreign Investment Investment Fund Exemption list. So that typically is entities in Australia that are listed on the Australian Stock Exchange that are resident in Australia, those companies are included in a sort of an exemption list. What that effectively means is that you don't need to apply the Foreign Investment Fund rules to those particular investments. You can just treat them, going to call it as normal investments where you pay tax on dividends as and when they
are received. For everybody else or everywhere else in the world that is subject to the Foreign Investment Fund rules. What effectively that does is it sort of ignores, if you like, the dividends that are paid, and the investments are taxed on the basis of a number of methods, but in the sense sort of deemed income for tax purposes and for individuals. The two main options there are the fair dividend rate and the comparative value method.
So you can choose which and just to stop you their mark, I think you wouldn't be subject to the Foreign Investment Fund unless you were investing fifty thousand in New Zealand or you had that in investments or is that right?
It's correct. There's a deminimus so an exclusion from having to apply these horrendous rules. If you if you if you hold foreign investment fund interests that cost are less than New Zealand fifty thousand dollars, if you are unfortunately fortunate enough to hold investments over that threshold, then you will be subject to these rules and the complications that go with that.
So if you had a couple of thousand dollars in Tesla, for example.
You'd probably be all right, that's correct.
It would only be if you had a fear bit more thinking of that though, surely at that stage you'd begin an advisor to have a lock unless you were a real wizard tax.
Yeah, there's not many people that have a go can I use that phrase? It doing it themselves. It's these rules are are incredibly complicated. The method dollar, the methods that are that are available to people to sort of return their income are tricky. And so we do recommend that if you are subject to the foreign investment fund rules, that you do seek to get some advice in and around the preparation of your tax position on an annual basis, because.
Could it be that without realizing it, you might actually almost be paying more tax than you're actually getting in a return.
That's correct, you know. So, for example, under the fair dividend rate method, you have a deemed dividend equal to five percent of the opening market value of that investment. So if you'd bought one thousand dollars of Tesla shares, for example, and they were valued at one thousand dollars on the first of April twenty twenty four, then your deemed income for the year will be five percent of that.
And if the dividend yield coming out of that Tesla stock is you know, around the one one to two percent, which often American companies do tend to have relatively low dividend yields, the actual cash dividend that you receive may be well less than the deemed income that you have from that investment under the fair dividend rate. There is another methodology that's available to natural persons and trustees of trusts,
and that's to use comparative value. And that comparative value methodology effectively seeks to tax you on the unrealized gain that you've had during the year. So if the shares were worth a thousand dollars at the beginning of the year and they're worth nine hundred and you've made a loss. You have a choice to be able to say, I'll
take that comparative value method. I'll take that loss, in which case your income under the Foreign Investment Fund rules is nil, and you do have the option to choose between years. So yeah, some of it can be quite complicated.
Just thinking if you've got a less complicated portfolio, but you are wanting to make sure that you are paying the tax you should be. Apart from the fact that she says has deducted from the distribution so far, are what resources are out there? I mean, does this wonderful podcast, But apart from the.
Yeah, so Inland Revenue you have some really good material on their website. You can obviously avail yourself of tools like chat GPT just sort of to sort of give you some sort of base base information around it shares. These and a number of other investment platform and providers produce resources that are intended to help provide some advice to investors about how these rules might potentially potentially work.
Our recommendation would be yeah, by all means, you know, undertake and do a bit of due diligence, get to get get familiar with with how you think the rules might apply. But then if you do have foreign investment fund interests, we'd recommend you engage in an appropriate skill tax advisor to help you sort of work your way
through those rules. It does get quite complicated, particularly if you've got dividends that are being received and there's withholding tax that's been deducted overseas, and you've got some withholding tax that's been deducted New Zealand. Sometimes the withholding tax that you can claim might be limited under the double taxation agreements that New Zealand has with the US, for example, and sometimes not the correct amount of taxes in fact being deducted, and so you may be limited around how
much you can actually claim. So someone can get quite tricky and you have to track and calculate the amount of tax credits on a line by line, investment by investment basis.
Thanks Mark for your insights today. It's been great to have you in the studio.
Thanks Helen. Hopefully I've managed to make tax a little less confusing for people, but you really appreciate the opportunity.
And thanks everyone for tuning in. Hopefully that was a bit more simple for you. You can watch shared Lunch on YouTube, or you can follow the podcast wherever you get your podcasts. Leave us at rating and tell us what you'd like to hear next. See you next time on Shared Lunch